Nearly 3 in 4 renters say they aspire to own a home, yet less than half can afford to purchase one in their area. This narrative of low affordability remains persistent and is particularly pronounced as we move through 2024. While housing prices have stabilized somewhat following the pandemic's skyrocketing surge, affordability remains a challenge. In 2024, the national median home sales price increased by 1.4% to $420,400 in Q3, reflecting modest growth but still presenting hurdles for many buyers. Mortgage rates, while slightly down from their 2023 peak, remain high at an average of 6.9%, perpetuating an affordability paradox for those trying to transition from renting to owning. With these market conditions in mind, the rental market's trajectory becomes critical: will renters continue to dominate even as rental prices edge upward while homeownership remains out of reach? The decline in U.S. homeownership rates, long a concern, remains evident in 2024. Currently, 37% of American households rent their homes, a slight increase from pre-pandemic levels. Among renters, 65% are young adults under 35, reflecting ongoing affordability barriers for younger generations. Meanwhile, among those aged 65 and older, homeownership remains high at 79%.

Millennials continue to represent the largest share of homebuyers, making up 44% of homeowners in 2024, up from 37% in 2021. Over half of all millennials now own a home, solidifying their status as the fastest-growing demographic in the housing market. Despite this, the average age at which Americans become homeowners continues to rise, driven by elevated home prices and high borrowing costs.

Renting has become increasingly costly as well, with rental rates climbing by 61% over the past five decades. In 2024, rents are expected to grow by an additional 4%, driven by persistent demand and limited rental inventory. For many, this creates a difficult choice: navigating rising rents or confronting the challenges of entering the homebuying market. Whether this trend continues will depend on broader economic conditions, including shifts in mortgage rates, wage growth, and housing supply.

Are Rental Rates Expected To Go Up?

Experts predict that year-over-year rental prices will increase in 2025, putting renters in a tough spot as unemployment rates and the cost of living also rise. Do keep in mind that the extent of these increases may vary by region and market conditions. A forecast for 2025 from multiple industry sources, including the Federal Reserve Bank of Dallas and CoStar Group, suggests that rent could increase by as much as 6% to 8%, with most predictions falling within the range of 5% to 7%. While the pace of rent increases is expected to slow compared to previous years, this does not necessarily translate to renters transitioning to homeownership. Elevated mortgage rates, predicted to remain above 6% for much of 2025, will continue to erode borrowing power, making home purchases unaffordable for many. Even though home prices are stabilizing after the sharp increases of recent years, affordability challenges persist, exacerbated by inflation and stagnant wage growth in some regions.

With many potential buyers sidelined, the demand for rentals is expected to grow. The combination of limited new housing inventory and high interest rates is likely to push more individuals into the rental market, further driving up competition and rent prices. This cyclical pressure underscores the complexity of affordability in the housing market heading into 2025. (Sources: Federal Reserve Bank of Dallas, Zillow)

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Renting Remains the More Affordable Option

Side-by-side comparisons of monthly mortgage and rental payments can paint a misleading picture. The average difference between the two is a mere $200 or so, making a mortgage payment slightly more expensive monthly. However, these comparisons need to factor in the additional money invested when taking out a mortgage. Closing costs and other home-buying expenses aside, a typical mortgage requires a down payment of 10% to 20%, representing savings most renters don't have. In addition, the average household wealth for homeowners in the United States is roughly $98,500 (excluding home equity), while renters have just $6,270 of the same. Even if all that money represented liquid funds that could be invested into a mortgage, more is needed to cover the $34,800 down payment on a $348k loan — the average cost to purchase a home in 2022.  In addition to the upfront cost of buying a home, long-term affordability remains a significant factor contributing to a growing rental population. For example, homeowner's insurance shows an average annual price of $1,200 in the United States compared to about $180 for renters insurance. Unfortunately, the affordability equation will be further stacked against renters in 2023 due to several factors, such as:

• New construction is down overall, and the number of new construction homes under $300k sits less than 9% compared to 42% in 2019.
• Housing prices remain elevated and with minimal correction in 2024.
• Mortgage rates are still high and we more than likely will not see those cherished COVID rates for some time, if ever again.

For all these reasons, it's anticipated that the number of people renting in the United States will grow in 2025. Likewise, the demand for rental properties will grow along with it, contributing to the increasing rental prices discussed above. So, what does that information mean to those who own property or are looking to invest in it?

Accommodating the Affordable Housing Gap

The United States has faced a housing shortage for some time now. With new home construction expected to fall to its lowest rate in over a decade, the housing gap will widen further. Investors considering entering the market may see this as an opportunity to buy and rent out a property. Still, increased home prices can make for a risky deal, even for those leveraging cash. Investors and property owners should find ways to create affordable housing using already-owned spaces to take advantage of the increased demand for rentals. The trends are already showing up:

• The number of Accessory Dwelling Units (ADUs) is rising. It is expected to continue well into 2023, with people adding granny flats and small apartments to their properties to accommodate short-term and long-term renters.
• Finished basements and projects that separate a part of the home to create an apartment/rental space are growing in popularity. These projects provide an affordable way for homeowners to leverage their space without complex permitting for additional structures.
• Investors can still get into the market by looking at listings outside the MLS. Examples might include pre-foreclosures and properties from sellers who bought at the height or end of the pandemic and now want to exit.

Even considering all these things with renters vs. owners, there are still ways to get into the housing market in 2023 and find a positive outcome. It just takes the right information and a powerful tool to help you find good opportunities.

About Prospect by Buildout

Prospect by Buildout is the first predictive modeling and marketing platform that provides real estate sales, brokerage, and lending professionals with robust systems and tools for extracting value from data through machine learning.  Brokers and investors interested in buying on- or off-market properties will find ProspectNow invaluable. Contact us to learn more about how our platform can help you locate the ideal property.