I’ve been to Mumbai about three times in the past decade or so. It’s the most packed city in India.
There’s no doubt it’s a magnificent, sprawling city full of wonder. Yet as far as large cities go, many think it’s more affordable than urban areas in China – a country that holds the world title for the largest housing bubble on the planet!
That might be. But what I can tell you is that I’ve talked to a number of hotel workers in Mumbai who have to travel as much as two whole hours to get to work in the city. Living in the city is completely out of the question. There’s no way they could afford to. And even the surrounding areas are pushing it.
I’ve no doubt there are countless such workers in the U.S., but even for those who can pull off renting in a big city, they haven’t got an easy time, either!
The housing bubble is now higher than ever in cities like San Francisco, Miami, Denver, Dallas and Houston.
They’re so bloated that most of the people in these cities can’t afford to own a home there. They can only rent.
But here’s the catch-22: renting hasn’t gotten easier. It’s gotten more expensive. By a lot!
Rents have been getting more and more expensive for three whole decades now. Between 1985 and 2000, renters spent an average of 24.2% of their income. Today, it’s 30.2%. That’s 24% higher!
Going into 2006, owning a home was the more attractive option.
Now, in 11 of the largest U.S. cities, all have seen rising renters. And nine of them are dominated by renters:
At the top of the list is Miami, FL. That doesn’t surprise me one bit as I used to live there. The average person can’t afford to buy its real estate. Into 2006 Miami had one of the biggest bubbles, and its crash was hence as extreme. And now it’s bubbled again, this time more than ever, due largely to foreign buyers from Latin America.
The other reason is that Miami has the lowest median wages of any large city in the country. No wonder 65% of its residents are renters!
I doubt the Big Apple at No. 2 is any surprise to you either. The city’s famous for being damn-near impossible to live in, affordability-wise. Its median wages are better than Miami’s, but still not as high as you’d expect.
Next comes Boston and L.A. at 60%. San Francisco’s a little better at 57% – it at least has the highest median wages of any major U.S. city. But its housing and rent costs are still off the charts.
Last is Philly. Compared to the others, it’s more affordable and has higher than average median wages. But of these 11 cities, its percentage of renters increased the most from 2006 to 2013 – from 37% to 44%, a whopping 20% increase.
Overall, demand for rentals is rising so fast in many cities it’s starting to overwhelm supply. That’s why rental costs are rising, while ownership costs are falling.
It’s unfortunate for all of us because many of these renters are millennials who, thanks to absurdly high rent costs, can’t afford to save for a down-payment on a home even if they wanted one – which right now, they don’t.
And I can’t blame them! They’re the first generation to see home prices fall significantly, then take their sweet time trickling back up.
But that means millennials will be late to the homeowner party. And for us, it will be devastating to our housing market as boomers increasingly fall off the demographic cliff.
It’s almost ironic, since thanks to lower interest rates – much of that artificial – mortgage payments have become more affordable since 2006, dropping from 21.3% to 15.1%, or 29% lower.
But for now, millennials are stuck renting. Their rental phase doesn’t peak until age 27, which means we’ll continue to see demand for rentals increase until at least 2017.
That could be despite a deep downturn ahead. After all, it’s not like all those millennials can go back to live with mom and pop, as so many already have.
For homeowners – especially in these large cities – I continue to advise you to sell all non-essential real estate.
If you’re holding onto property because you’re renting it out for stable monthly income, that’s fine – though I’d much rather have the cash on hand to buy up investments that get slaughtered through the global downturn ahead.
But if you’re a boomer hoping to retire on the value of your home in the next five to 20 years, think again. Demographics show we’ll never see these heights again.
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