The Rent Trap Is Real. Here's How to Avoid It

Want to buy a home in the year ahead — but feel glued in place thanks to ever-rising rent prices? You’re not alone. Here in Chicago and across the country, millions of Americans are stuck in what real estate experts call “the rent trap” a situation where so much of a household’s income goes to rent that they have to struggle to save enough to buy a home (let alone save for a rainy day, or take on other major bills, like healthcare costs).

A 2017 report from the Urban Institute suggests that more than 25 percent of renters – or 11.1 million households – are “severely cost-burdened” and spend “at least half their income on rental housing.”

It’s no surprise that so many are feeling trapped by rent especially when you consider how dramatically rent prices have been increasing, here in Chicago and in markets around the country. According to data compiled by the real estate site Zillow, US renters paid more than $4.5 trillion in rent during the 2010s, including $512 billion in 2019 alone. In 2019, a separate Zillow report suggests that the nationwide median rent grew 2.0% year-over-year (from August 2018 August 2019), reaching $1,595. Here in Chicago, median rent exceeded the national level, ringing in at $1,617, and grew by more year-over-year, rising by 2.6%. 

A study brought to our attention by RentCafe spotlights similar trends. RentCafe estimates that the national rent average increased by 3.3% year-over-year. Per RentCafe, the average rent in Chicago significantly surpassed the national average as of August 2019, coming in at $2,007 per month (compared to roughly ~$1472/month nationally). This marks a total year-over-year increase of $105 for the Chicago market. 

While that all may not seem too significant in a vacuum, these increases really do add up – particularly when you consider how dramatically rents may rise over the span of 10, 20, or 30 years. For a look at that effect in action, check out this graph, courtesy of Keeping Current Matters

 

In Chicago, one practical way to break free of the rent trap – and lock yourself into a consistent, manageable monthly payment for years on end – is to purchase your own home. Buying a home is one of the most stable long-term investments there is. It’s a proven way to build wealth, with countless benefits to offer your pocket book, in both the short-term and the long. 

While buying a home in 2020 may seem like a daunting task, it’s more achievable than you might think – and you will start experiencing the benefits before you know it! Here are a few things to keep in mind when it comes to renting vs. owning in the Chicago market:

Owning a Home Is Often Cheaper Than Renting

As a 2017 Zillow report noted succinctly:

“Looking strictly at housing market numbers, there is a concrete point at which buying a home makes more financial sense than renting it.”

And that “breakeven” point has a lower threshold than you might think. In fact, in the 100 largest metro areas of the US, homeownership with a 20% downpayment on a traditional 30-year fixed rate mortgage is cheaper than renting by an average rate of 33.1%, according to a study from Trulia. In Chicago, it was 33.9% less expensive to own a home than rent as of 2017, per Trulia. 

Calculations presented by the National Association of REALTORS (NAR) also found that, under typical conditions, a homeowner's monthly payment may be less than a renter’s monthly payment after just three years, when accounting for rising rents and the tax benefits that come with homeownership. 

What’s more, with mortgage rates remaining near historic lows (as many 2020 forecasts predict), chances are good that you’ll be able to lock in a rate that remains affordable for the life of your loan. This means that you’ll be paying a consistent monthly cost, even as unpredictable factors (such as inventory, tax code changes, or interest rate hikes) change and influence home and rental prices

Owning a Home Comes With Long-Term Financial Benefits

In addition to locking in your mortgage rate and getting a handle on your monthly payments, there is further evidence that owning a home comes with long-term financial benefits that often elude renters.

There’s a common piece of real estate wisdom that says, basically, whether you rent or buy, you’re paying a mortgage. When you rent a property, you’re just paying someone else’s mortgage – meaning that you’re making them richer, and seeing none of the benefits for yourself!

When you own, though, you’re investing in your own future. There’s a reason why consumers consistently name homeownership as the single best long-term investment. In fact, as of 2019, 35% rank real estate as the best long-term investment, over stocks, savings accounts, and even gold. 

Owning a home is a form of forced savings, allowing you to build equity that you can then use later in life. As a homeowner, you’ll also get to benefit from tax advantages, while also paying less than many renters month-to-month. Real world studies bear this out. In fact, one prominent Harvard study revealed that, as of 2018, a homeowner 65+ years old generally has a net worth of $319,200 compared to a net worth of just $6,710 for a comparable renter. 

Bottom line? Owning a home is a surefire way to build wealth for yourself. When you pay rent, you’re still building wealth – it just all goes straight to your landlord.

It’s Easier to Buy a Home Than Many Think

Would you believe that one of the biggest factors keeping people in the rent trap may be all in their heads? (Cue Psycho music and lighting strikes here.)

While there are certainly real financial and personal hurdles to clear before you are ready to purchase a home, many people actually tend to overrate the potential difficulty of getting started with homeownership. In other words? They turn mountains into molehills, and stop themselves from entering the process before they even really get a chance to get started!

For example, one major study of millennial renters found that 72 percent cited affordability as their primary obstacle to ownership, with many expressing worries about their credit scores and 53 percent saying that a downpayment would be an obstacle.

But here’s the thing – many potential homeowners tend to overestimate how much they’ll actually need to make a successful downpayment (and there are various resources and benefits out there for households in need of downpayment assistance). Many potential home buyers also tend to think that they need a perfect credit score in order to buy a home; in reality, more than 50 percent of all approved home loans come from FICO scores below 750.

So, if you’re currently renting, don’t count yourself out just yet! Homeownership – and all the short- and long-term financial incentives it offers – may still be within your grasp!

Ready to Explore the Chicago Market?

Want to start planning to make the switch from renting to owning? To talk about your options, or begin the search for your Chicago home, don’t hesitate to drop Real Group RE a line today! Our experienced brokers will do whatever it takes to find you the right home, while making the process easier at every step of the way.

Thinking of buying a home?

Real Group Real Estate

Contact Our Team Today

Contact Us
Please enter your name!
Please enter your email!
Write your message!

Search Our Blog

 

 

Subscribe to our Newsletter


Baird & Warner

2526 N Lincoln Ave
Chicago, IL 60614

Login Form

© 2013 - 2017 Real Group Real Estate at Baird & Warner. All Rights Reserved. Designed By Geek Chicago
Baird & Warner, 2762 N Lincoln Ave. Chicago, IL 60614 - Privacy Policy