It is always surprising to me how much space a renter gets for $2,000 or less a month. For many parts of Northwest D.C., $2,000 a month rents a junior one bedroom. For most places in the country, this rent is considered delusional whereas it has become a norm in the District.
The D.C. housing market is one of the strongest and most expensive in the United States. With steadily rising prices and a constant demand for housing, the market for owning a house is consistently a great investment. However, the ability to own carries a high barrier for entry for some potential buyers (more on that below). Moreover, the market for renting is a complicated story. Housing inventory has always been a problem within the District with a limited supply and restrictions on the size of buildings that can be developed. As more people move to the District with hopes of renting an apartment, rents are expected to rise.
A recent study conducted by RealtyTrac analyzed the rental affordability in most major urban markets. Affordability was defined not only by the price of average rent, but also by the proportion of living wages necessary to afford rent. The findings put Washington, D.C. as the second least affordable market in the United States (behind only Honolulu, Hawaii). The study predicts that renting in the D.C. area requires nearly 60 percent of average wages, which is much higher than the national average of 37 percent. Moreover, rents are rising at an average over 3.7 percent whereas wages increase only around 2.5 percent per year.
In 58 percent of the United States it is cheaper to buy than it is to rent. Overwhelmingly, the D.C. area falls into this category of cheaper to buy. However, many in the population of potential buyers are left out of the market because of higher debts and obligations compared to a previous generation. For example, a first-career couple with a household income of six figures is less likely to afford their one-bedroom apartment due to a rent payment that exceeds their ability to save coupled with hundreds of dollars a month in student loan payments. These factors, along with a higher cost of living in the District, makes homeownership challenging. This month-to-month cycle of making ends meet without saving for a down payment creates an environment in which homeownership appears unobtainable.
What can renters do to escape the perpetual trap caused by high rents? The answers may surprise you. First, become informed. Many buyers still believe and accept that a 20 percent down payment is required to purchase. Instead, many lenders now have loan options from no down payment (like the D.C. Open Doors program) to just a couple percent. Additionally, renters need to know the benefits of home ownership from a taxable perspective. Property taxes are lowered with owner-occupancy in the District, and interest paid on your loan is tax-deductible. These benefits are not well known, and renters should consider speaking with a financial planner or loan officer to explore these benefits.
The takeaway is simple: home ownership in Washington, D.C. is possible. As rents continue to rise, many renters will be stuck in a system where they cannot afford to put money aside to purchase a home. However, taking the risk to purchase will prove far more effective than continuing to pay your landlord’s mortgage.
Tim Savoy is a real estate agent with Coldwell Banker Residential Brokerage Dupont/Logan. Reach him at 202-400-0534 or [email protected].