Rents Soar as Starter-Home Inventory Keeps Shrinking

Monopoly houses on coin piles

Rents rise as there are fewer options for home buyers.

According to a recent federal report on the consumer price index (CPI), rental income rose by 3.3 percent over the last 12 months which is the largest rise since 2007. The increase also outpaced inflation by up to nearly four times over the last 12 months.

Analysts believe that while rental prices increased at a slower pace over the last few months, the causes behind the surge remain unresolved. The major force which pushes rents higher is the fact that prospective home buyers find it harder to buy a new home, so they would rather rent one.

Real-estate-market analysts noticed that while the inventory of premium houses has increased since 2012, the supply of starter homes plunged 44 percent over the same period. Additionally, the inventory of “trade-up” homes also dropped, by 41 percent.

But as the inventory is getting smaller prices keep climbing. For instance, the average price of starter homes jumped over 30 percent over the last four years. According to analysts, housing costs now consume 38 percent of the income of home buyers. By contrast, these costs consumed only 32 percent in 2012.

As a result, fewer Americans decide to own a new home. The home-ownership rate, which currently sits at 63 percent, was nearly 70 percent in 2004.

But the starter-home inventory doesn’t shrink at the same pace across the country. For instance, eight cities out of 100 with the fewest number of starter homes are located in California. In cities like Denver the inventory plunged 77 percent while prices surged 78 percent. In Salt Lake City, Utah, the inventory collapsed 88 percent, in San Antonio, Texas, it sank 86 percent, while in Austin, Texas, it fell 83 percent.

The starter home supply had the smallest decreases in Phoenix, Arizona (-59 percent), Dayton Beach, Florida (-60 percent), and Cambridge, Massachusetts (-61 percent).

A pew study found that the hardest hit are low-income families which now spend about 40 percent of their income on housing and nearly half of their income on rent. As a result, many of the renters spent less on entertainment and restaurant meals.

Pew researchers also found that while household expenditures rose by nearly a quarter between 1996 and 2014 with large pauses during the financial crisis, household income has shrunk. According to the study, income slipped 13 percent between 2004 and 2014 while expenditures rose 14 percent.

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