Los Angeles is officially among the least affordable housing markets in the country. According to a report from proptech giant, Redfin, 0% of LA homes are more affordable to buy than rent. This means that locals are pretty much guaranteed to have higher monthly housing expenses if they buy than if they rent.
This hasn’t always been the case. Before 2014, LA locals could save money by purchasing a home because rental rates were typically higher than mortgage payments. In fact, this was standard housing market economics for decades. Residents had the option to rent while saving for a down payment or transitioning to a new area, but most people purchased homes as soon as possible to start saving money and building equity.
So what happened? How did LA become a market of renters? And what does this mean for would-be homebuyers and real estate investors?
Renting vs. Buying in LA by the Numbers
As of March 2023, the estimated median monthly mortgage cost for a single-family home in Los Angeles was $6,454. By comparison, the median monthly rental rate of $3,612 seems like a bargain! After all, the average renter could save $2,842 per month in housing expenses compared to the average homeowner.
How did we get to this point where it costs so much less to rent?
Why is Homeownership So Expensive in LA?
There are several factors contributing to the increased cost of homeownership in LA. Consider the following:
- High demand. Los Angeles is a highly desirable location thanks to world-class amenities, pleasant weather, and ample job opportunities.
- Low inventory. Between geographic barriers, lower-density zoning laws, a general lack of new construction, and older homeowners opting to “age in place,” there just aren’t enough homes to meet the high demand.
- Higher interest rates. While today’s interest rates are still below the 50-year average, they are a shock from the extremely low rates we’ve seen since the Great Recession of 2008. Interest rates make a big difference in housing expenses. For example, an interest rate increase from 5% to 7% increases the monthly mortgage payment by $513.93 on a $400,000 loan. And many buyers are taking on loans much larger than $400,000 in high-value markets like LA.
What Does This Mean for Would-Be Homebuyers?
Renting is currently far more affordable than buying in LA. And there’s no shame in renting rather than buying. Plus, real estate investment companies are developing unique housing solutions to better serve you. For example:
- ADUs (accessory dwelling units) are being built on single-family lots to increase the inventory of affordable housing.
- The US government is incentivizing developers to build more Section 8 housing units, which are designed as an affordable option for veterans, senior citizens, low-income families, and differently-abled residents.
- Developers are designing “co-living” spaces for renters with multiple roommates. Apartments with four or five bedrooms allow for more roommates, which means more people to split the rent. This ultimately reduces the rent required from each roommate.
- Developers are also designing rentals for growing families. These “build-to-rent” units give you a similar experience to having a home of your own without the prohibitively high mortgage payment.
If you were hoping to buy a home in LA, take heart. It might not feel like the right time to buy, but timing the market is a poor strategy. The fact is, there’s never a bad time to invest in real estate. As long as you can afford the mortgage payment, you will benefit from long-term appreciation of your home. And you won’t be subject to ongoing rental price increases when you own your home!
What Does This Mean for Real Estate Investors?
Real estate investors have an opportunity to serve the millions of renters in LA. But you have to be more strategic to be profitable today.
When buying was more affordable than renting, you could practically buy any property, and then rent it for enough to cover your ownership expenses. In today’s market conditions, you need to carefully choose investment projects that can command rental rates that exceed the cost. This means considering ground-up developments, perhaps build-to-rent residences, rather than turn-key rental properties. It also means designing structures that meet the needs of today’s renters (like the ADUs, Section 8 housing, or co-living spaces we just discussed in the previous section).
Of course, as real estate prices increase, along with labor and material costs, individual investors may have a hard time financing a real estate investment project alone. This is why today’s real estate investors are joining real estate crowdfunding projects which provide all the benefits of real estate investing without the high upfront expense or time-consuming project management.
The Bottom Line
None of the homes in Los Angeles are more affordable to buy than rent. But that doesn’t mean there aren’t opportunities in the LA housing market. You just need to find the right real estate investment strategy for you.