Many Big-City Renters Earn Enough to Buy

In many of the country’s largest rental markets–even those markets with some of the highest home prices nationwide–a large number of on-market renters have the ability to buy the median home in their market.

Zillow Inc., Seattle, said nearly 14 percent of on-market renters have strong credit scores, relatively high incomes and could afford to buy the median home in their market.

The company’s Rental Profile report said as the homeownership rate declined over the past decade, a broader socio-economic swath of Americans are renting than at any time in recent history. That means people who could afford to buy are renting instead, increasing competition for limited available homes for rent.

In particular, San Jose, San Diego and San Francisco have the largest segments of on-market renters who have the credit score and income necessary to purchase a home, making those metros highly competitive for renters, Zillow said. Los Angeles, New York and Seattle also have large segments of current renters who are financially qualified to buy a home.

“When faced with hurdles of high prices and low inventory, first-time homebuyers are renting longer than ever before even if they are qualified to buy,” said Zillow Chief Economist Svenja Gudell. “San Jose, San Diego and Seattle are among the most competitive places for buyers, and the going isn’t any easier for renters–as they are competing against throngs of financially sound applicants with strong credit and high incomes. This is a conundrum for many young people who move to those cities because of their strong job markets, only to find tight inventory and steep competition standing between them and their dream home.”

Zillow examined self-reported credit scores and incomes of renters who were on the market during the first half of 2016. It also also looked at regional median rental and home values and competition to determine the markets with the highest share of renters who reported a monthly income equal to or greater than necessary to afford the typical rental and median home in the metro area.

The report also pointed out long-term demographic trends impacting renter qualifications and competition: young adults, both the affluent and otherwise, are renting longer than ever before as they delay many of the hallmarks of adulthood that typically lead to homeownership, such as finishing their education and starting families.

“In general, markets with lower homeownership rates have higher proportions of on-market renters with both strong credit and high incomes,” the report said. “That said, even when controlling for the homeownership rate, booming markets closely associated with the tech industry–such as San Jose and San Francisco–tend to have exceptionally high proportions of highly qualified, on-market renters.

At the other extreme, Zillow said, markets that tend to have higher homeownership rates, such as Houston, and metros that were particularly hard hit during the housing bust and foreclosure crisis, including Cleveland and Detroit, have lower shares of renters who report both strong credit and high incomes.