House Payments More Affordable Than Fair Market Rents in 76 Percent of U.S. Housing Markets According to County-Level Analysis

Analysis Identifies Best and Worst Markets for Rental Returns and Emerging Rental Markets;
56 Counties Most Favorable for Buying Based on Affordability, Home Prices, Wages 

IRVINE, Calif. – April 9, 2015 — RealtyTrac® (www.realtytrac.com), the nation’s leading source for comprehensive housing data, today released a Residential Rental Property Analysis for properties purchased in the first quarter of 2015, which found that the monthly house payment on a median-priced home is more affordable than the monthly fair market rent on a three-bedroom property in 76 percent of the U.S. counties included in the analysis.

The report also ranked the markets with the best — and worst — potential returns on residential rental properties from a real estate investor perspective along with the most affordable — and least affordable — markets for renting from a renter perspective.

The analysis included 461 counties nationwide with a population of at least 100,000 and sufficient home price, income and rental data. The combined population in the 461 counties analyzed was 217 million. On average across all 461 counties, fair market rents as set by the U.S. Department of Housing and Urban Development represented 28 percent of the estimated median household income, while monthly house payments on a median-priced home — with a 10 percent down payment and including property taxes, home insurance and mortgage insurance — represented 24 percent of the estimated median income.

“From a pure affordability standpoint, renters who have saved enough to make a 10 percent down payment are better off buying in the majority of markets across the country,” said Daren Blomquist, vice president at RealtyTrac. “But factors other than affordability are keeping many renters from becoming buyers, a reality that means real estate investors buying residential properties as rentals still have the opportunity to make strong returns in many markets.

“Also, keep in mind that in some markets buying may be more affordable than renting, but that doesn’t mean buying is truly affordable by traditional standards,” Blomquist added. “In those markets renters are stuck between a rock and hard place when it comes to deciding whether to buy or continue renting.”

56 markets where conditions favor buying rather than renting

There were 351 counties out of the 461 analyzed (76 percent) where house payments on a median-priced home in the first quarter of 2015 were lower than fair market rents on three-bedroom homes.

Among these 351 counties, there were 56 counties where home prices rose at least 7 percent compared to a year ago and wages rose at least 3 percent annually — additional factors that could make owning a home more attractive than renting. Wages were from the most recent weekly wage data available from the Bureau of Labor Statistics, the third quarter of 2014.


Out of the 56 counties where conditions favor buying over renting, the most affordable for buying were Bay County, Michigan in the Bay City metro area (11 percent of median income to make house payments on a median priced-home), Fayette County, Pennsylvania (11 percent) and Beaver County, Pennsylvania (14 percent), both in the Pittsburgh metro area, Tazewell County, Illinois in the Peoria metro area (14 percent), and Butler County, Ohio in the Cincinnati metro area (14 percent). “When considering the financial aspects of renting versus owning within the majority of the Ohio markets, the better financial opportunity is in ownership,” said Michael Mahon, executive vice president at HER Realtors, covering the Ohio housing markets of Cincinnati, Dayton and Columbus. “With many markets in Ohio seeing double-digit appreciation year over year, the cost of homeownership and renting will only go up in future years, while purchasing options offer attractive low interest rates for homeowners to stabilize monthly household expenses, while equally building equity within their household investments. “As wage growth continues to stagnate, those consumers choosing to rent will see more and more of their net wages being devoted to increased housing costs in the future,” Mahon added. Other counties among the 56 where conditions favor buying were Harris County, Texas in the Houston metro area, Tarrant County, Texas in the Dallas metro area, Fulton County, Georgia in the Atlanta metro area, Fresno County, California, and Prince George’s County, Maryland in the Washington, D.C., metro area.

Most affordable rental markets

Markets where the fair market rent on a three-bedroom property represented the smallest share of median household income were Delaware County, Ohio in the Columbus metro area (14 percent), Williamson County, Tennessee in the Nashville metro area (14 percent), Hamilton County, Indiana in the Indianapolis metro area (15 percent), Fort Bend County, Texas in the Houston metro area (16 percent), and Howard County, Maryland, in the Baltimore metro area (17 percent).

Least affordable rental markets

Markets where the fair market rent on a three-bedroom property represented the biggest share of median household income were Bronx County, New York (69 percent), Baltimore City, Maryland (49 percent), Philadelphia County, Pennsylvania (48 percent), Kings County/Brooklyn, New York (48 percent), and Miami-Dade County, Florida (45 percent).

“As wages continue to lag home price appreciation in Southern California, and a significant percentage of buyers still coming from outside and internationally, the need for rental units will continue to grow,” said Mark Hughes, chief operating officer with First Team Real Estate, covering the Southern California market, where the fair market rent on a three-bedroom home in Los Angeles County requires 42 percent of the median household income and where house payments on a median priced home require 61 percent of the median household income. “The inequity between service wages and property costs in our region lends itself to a high rental population of folks that may have been priced out of buying.  I recommend that renters who are able to purchase do so with a four- to five-year ownership horizon.”


 

Markets with the highest returns on residential rental properties

Among all 461 counties analyzed the average potential annual gross rental yield for homes purchased in February 2015 was 9.34 percent. The annual gross rental yield is calculated by annualizing the rental income and dividing that amount into the purchase price of the property. Markets with the highest potential annual gross rental yields for homes purchased in February 2015 were Baltimore City, Maryland (24.82 percent), Clayton County, Georgia in the Atlanta metro area (24.26 percent), Wayne County, Michigan in the Detroit metro area (21.08 percent), Pasco County, Florida in the Tampa-St. Petersburg metro area (19.20 percent), and Trumbull County, Ohio in the Youngstown metro area (18.36 percent).

Markets with lowest returns on residential rental properties

Markets with the lowest potential annual gross rental yields for homes purchased in February 2015 were New York County/Manhattan, New York (2.34 percent), San Francisco County, California (3.20 percent), Kings County/Brooklyn, New York (3.63 percent), Marin County, California in the San Francisco metro area (3.84 percent), and Williamson County, Tennessee in the Nashville metro area (3.89 percent).


 

58 emerging rental markets on the rise

Among the 461 counties analyzed nationwide, the average potential annual gross rental yield was down 42 basis points for properties purchased in February 2015 compared to properties purchased a year ago. There were still 115 counties where potential annual gross rental yields increased compared to a year ago, and among those there were 58 counties that also saw rising rental rates, rising home prices and rising average weekly wages. Among the 58 counties with the combination of rising rental returns, rising rental rates, rising home prices and rising wages, those with the biggest increase in rental returns were Douglas County, Oregon in the Roseburg metro area (potential rental returns increased 119 basis points from a year ago), Linn County, Iowa in the Cedar Rapids metro area (109 basis point increase), Henderson County, North Carolina in the Asheville metro area (109 basis point increase), Kendall County, Illinois in the Chicago metro area (89 basis point increase), and Sussex County, Delaware in the Seaford metro area (80 basis point increase).

Other markets among the 58 counties included Cook County, Illinois in the Chicago metro area (43 basis points increase), King County, Washington in the Seattle metro area (12 basis point increase), the Long Island, New York counties of Suffolk (49 basis point increase) and Nassau (24 basis point increase) and Wake County, North Carolina in the Raleigh metro area (30 basis point increase).

“With the economic boom that Seattle is experiencing right now – especially in the tech sector – this is a great time for rental investors. Our advice to them is to purchase properties that are in proximity to some of our more successful businesses, like Amazon and Microsoft, and the extensive tech hub in downtown Seattle where companies like Facebook, Apple, and Google have all set up offices,” said OB Jacobi, president of Windermere Real Estate, covering the Seattle market, where annual gross yields on rentals range from 6 percent to 10 percent. “With record numbers of people expected to relocate to Seattle over the next five years, it stands to reason that rental properties will continue to be a sound choice for investors.”

“Buying single family homes as rental properties in Southern California is reserved for those that have a very specific investment strategy,” said Mark Hughes, chief operating officer with First Team Real Estate, covering the Southern California market, where annual gross yields on rentals range from less than 5 percent in Orange County to nearly 9 percent in the inland San Bernardino County.

Methodology

For this report, RealtyTrac looked at all U.S. counties with a population of 100,000 or more and with sufficient home price and rental rate data. Rental returns were calculated using annual gross rental yields: the 2015 average fair market rent of three-bedroom homes in each county from the U.S. Department of Housing and Urban Development (HUD), annualized, and divided by the median sales price of residential properties in each county.

RealtyTrac also incorporated average weekly wage data and unemployment rates from the Bureau of Labor Statistics and demographic data from the U.S. Census into the report.

Estimated home payment amount was made assuming a 10 percent down payment, an interest rate of 3.7 percent on a 30-year fixed loan, and property tax and insurance totaling 1.39 percent of the total median sales price. An additional 1 percent of total loan amount was assumed for private mortgage insurance.

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This RealtyTrac report is the result of a proprietary evaluation of information compiled by RealtyTrac; the report and any of the information in whole or in part can only be quoted, copied, published, re-published, distributed and/or re-distributed or used in any manner if the user specifically references RealtyTrac as the source for said report and/or any of the information set forth within the report. 

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RealtyTrac is a leading supplier of U.S. real estate data, with nationwide parcel-level records for more than 130 million U.S. parcels that include property characteristics, tax assessor data, sales and mortgage deed records, default, foreclosure, auction, and Automated Valuation Models (AVMs) along with more than 45 key local and neighborhood dynamics for residential properties nationwide via its subsidiary, Homefacts.com.  RealtyTrac’s housing data is relied on by the Federal Reserve, U.S. Treasury Department, HUD, numerous state housing and banking departments, investment funds as well as millions of real estate professionals and consumers, to help evaluate housing trends and make informed decisions about real estate.

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