Zillow report backs buying, not renting

Highlights:

• Zillow releases national report on renting vs. buying.
• Zillow finds in Denver rents will eat up 35% of income.
• Zillow report shows 21% of income goes to mortgage for Denver homeowners.

A Zillow report has provided more ammunition to those who say consumers in Denver are better off buying a home than renting an apartment.

A typical renter in the Denver area in the second quarter spent 35 percent of their income on rent in the second quarter, but homeowners spent only 21.1 percent of their income on their mortgage, according to a report released on Wednesday by Zillow.

Historically, rents soaked up 23.4 of incomes in Denver, according to Zillow.

Despite the big run up in housing prices in Denver, the historic percentage of income going toward the mortgage payment in Denver is relatively unchanged from 21.1 percent from 1985 to 2000.

And even if mortgage rates jump to 6 percent next year, from about 3.8 percent today, buyers can expect that the mortgage payment will take up 28.1 percent of income in Denver, according to Zillow, a Seattle-based real estate data company with a $4.4 billion market cap.

Nationally, income spent on mortgages is 15.1 percent and 30.2 percent for rent, according to Zillow.

Denver, and four California cities, are the only markets in the U.S. where both owning a home and renting are “more unaffordable” than pre-recession, according to Zillow.

That is not surprising, since Denver showed a 15.4 percent year-over-year appreciation rate for homes in the first quarter a 4.5 percent jump from the first quarter, the biggest percentage gains in the nation, according to Zillow.

Rental rates also are at record levels locally.

“In Denver and four California metros, both renters and buyers can expect to pay more of their income towards either rent or mortgage payments than in pre-bubble years,” according to Zillow. “In hot San Jose, renters and buyers should each plan to put about 42 percent of their incomes towards housing,” according to the report.

Rising rents across the country are taking a toll on society.

“Our research found that unaffordable rents are making it hard for people to save for a down payment and retirement, and that people whose rent is unaffordable are more likely to skip out on their own healthcare,” said Zillow Chief Economist Svenja Gudell.

He encourages consumers to buy rather than rent.

“There are good reasons to rent temporarily – when you move to a new city, for example – but from an affordability perspective, rents are crazy right now,” Gudell said. “If you can possibly come up with a down payment, then it’s a good time to buy a home and start putting your money toward a mortgage,” according to Gudell.

Long-term, buying is almost not only a better financial option than renting, but also is one of the best ways to build long-term wealth, said Lane Hornung, CEO of 8z Real Estate. (8z sponsors Denver Real Estate Watch.)

“I get renting,” Hornung said. “Renting can be a really good option for some people. It is much more of a lifestyle decision than a financial one.”

“Some people want to be very mobile and don’t want the burdens of homeownership,” he said.

However, especially with rents at record levels, the bottom financial line favors buying, he said.

“Buying crushes renting, from a straight financial perspective,” Hornung said.

Also, one of the biggest contributors to a person’s longterm net worth, often more important than the degree a person earns or their income, is at what age they bought a home, Hornung said.

“Anecdotally, I know a guy who I mentored through Greenhouse Scholars,  who just turned 26 and has closed on his fourth investment property,” Hornung said.

“I bet when he is in his 40s and 50s, he will be financially better off than many of his peers, who also have good jobs and good incomes,” Hornung said.

Housing consultant S. Robert August couldn’t agree with Hornung more.

“I think absolutely in almost all cases people are better off buying than renting,” said August, assuming that they can qualify for a mortgage and plan to stay in the area for several years.

Economist Patty Silverstein, principal of Development Research Partners and the chief economist for the Metro Denver Economic Development Corp., is skeptical of the Zillow report.

“If you were only going to spend 15 percent of your income on your mortgage and 30 percent of your income on your rent, it is a no brainer, you should buy,” Silverstein said. “But spending only 15 percent of your income on your mortgage sounds incredibly low to me. It just doesn’t sound right.”

However, if you accept Zillow’s findings, “I think it is great that Denver homeowners are only paying 21 percent of their income on mortgages, given the incredible run of housing prices,” Silverstein said.

On the other hand, the mortgage is only one cost of owning a home, she pointed out.

“What about the cost of property taxes? What about the cost of home insurance? What about the cost of fixing and maintaining things? Zillow doesn’t seem to be factoring those costs in,” she said.

Also, many apartment units are being built in downtown Denver and along light rail, so the cost of commuting for renters may be less than if they owned a home, she said.

Additionally, most new apartment communities have lavish workout facilities, saving renters the cost of belonging to a health club.

“Don’t get me wrong,” Silverstein said.”Rising rents in Denver is a very big concern. But there are a lot of factors to consider. On face value, it may look like it makes more sense to buy than to rent. That would certainly would be the conclusion you would draw just looking at their numbers. But that would be a very dangerous conclusion.”

She also said it isn’t fair to single out Denver as being one of the five most unaffordable markets in the country, just because prices are higher than before the Great Recession.

She noted that Denver is one of 17 of the 35 cities that exceed the national averages for income spent on mortgages and rent, according to Zillow.

“Denver is in a different part of its business cycle than many other cities,” Silverstein said.

“Denver was one of the first cities in the nation to bounce back from the Great Recession,” she said.

A big part of the recovery has involved rising home prices.

Zillow noted than in St. Louis, homeowners only pay 11 percent of their incomes on their mortgage, 10.9 in Indianapolis, and 10.7 percent in Pittsburgh. Does that mean it makes more financial sense to own a home in a city like those than in Denver?

“I think where Denver is in the business cycle is a preferred situation than being in a city where you can’t sell your home or move, because your home is still worth less than it was before the housing bubble burst,” Silverstein said.

Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com.DenverRealEstateWatch.com is sponsored by 8z Real Estate. To read more articles by John Rebchook, subscribe to the Colorado Real Estate Journal.