Millennials priced out of Palm Springs rent

For renters hoping to buy their first homes, the transition has seldom been harder.

Here's the situation, according to an annual study from Harvard's Joint Center for Housing Studies: The percentage of Americans who rent their homes is at its highest level in 50 years. Nearly half of renters spend more than the recommended 30 percent of their income on housing. And between 2001 and 2014, rents rose 7 percent nationwide while inflation-adjusted incomes fell by 9 percent.

At the same time, banks tightened lending standards after the recession, which makes it harder for many young adults to qualify for mortgage loans.

“A number of factors have fueled soaring demand. The bursting of the housing bubble played an important role,” wrote the authors of the study, which was released in December. “Household incomes have also fallen back to 1995 levels and access to mortgage credit has tightened, making the transition to homeownership more difficult for many who might otherwise buy homes.”

In the Coachella Valley, the median renting household earns just $30,200 per year, according to census data. Nearly 58 percent of renters break the “30 percent rule." And in November, the median home cost $290,000, according to real estate research firm CoreLogic DataQuick — meaning a 20 percent down payment would be nearly twice as large as the median renter's annual income.

“The thing I feel really guilty about is, with rent, that money is gone. With a mortgage, at least I’m getting something in return,” said Alexis Ortega, 28, who shares a one-bedroom apartment in Palm Springs. "But it feels almost unattainable because of the down payment. I could put a lot of savings into a down payment, but then I wouldn’t have any savings.”

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Ortega, a Stanford graduate who works at the Desert AIDS Project, used to rent a bedroom in her father's house. But after years of sharing the home with four other adults, she and her partner decided to move out. They now split a $950-per-month one-bedroom apartment.

“As soon as you move out, all that money just dwindles,” said Ortega, who said the best part of living at home was the money she saved.

Roxanne Terwelp, 26, has already been renting in Palm Springs for five years. When she and a roommate moved into their two-bedroom unit near downtown five years ago, rent was just $875. It's crept up to $1,000, and Terwelp said units on the market now ask $1,200. And since their staircase overlooks the cranes rising over downtown, she's worried about continuing increases.

According to data from real estate research firm Real Answers, rental prices in Riverside and San Bernardino Counties increased 8.5 percent from the third quarter of 2014 to the same period in 2015. Across the state, rents increased by 9.1 percent on average.

Since 2012, rents per square foot in the Inland Empire have increased by 14 percent, according to Real Answers. Zillow data shows that Palm Springs outpaced that: per-square-foot rental prices jumped 17 percent from 2012 to 2015.

Conventional financial wisdom says a household should spend no more than a third of its income on housing costs, including rent, utilities and insurance. Even with a roommate, Terwelp said that's "impossible” for her. The Banning native works four different jobs downtown, earning $13 per hour on average.

"My entire rental history, that (30 percent rule) has never been true," she said. "With air conditioning bills and the cost of rent here, that's never happened for me."

According to census data, 58 percent of Coachella Valley renters spend more than 30 percent of their income on housing, including rent and utility payments. For comparison, only 43 percent of the valley’s homeowners spend the same amount of their earnings on housing.

Experts: High rents can slow homebuying

Rather than pushing renters to buy homes faster, experts say high rents can actually slow the homebuying process. The more renters spend, the less they can save for a down payment.

“Rent is really high — you’re talking $1,500, $1,600 in rent. To say, ‘stop doing that and buy a house’ — that’s easier said than done, because you’ve got to have a down payment,” said Beverly Fitzgerald, outgoing president of the California Desert Association of Realtors.

Fitzgerald said lenders prefer buyers who can make the largest down payments possible, ideally 20 percent of the purchase price.

“I think the down payment is quite sizeable as a barrier,” added Rodney Ramcharan, director of research at the University of Southern California's Lusk Center for Real Estate. Ramcharan pointed to strict lending laws imposed by the Consumer Financial Protection Bureau, which forbid banks from loaning to people with too much debt or too little income. For securing a loan, he said, a 20 percent down payment “is pretty necessary these days.”

Juliana Marroquin, 22, is saving for a down payment now. She and her husband talked to a lender last summer and learned they could only get approved for a $100,000 loan. So they’re leaving their two-bedroom apartment — $900 per month in Palm Springs — and moving back in with her in-laws.

“I’ve been looking at the math,” Marroquin said. “If we really stick to our budget, we can do it in two years” — save for a down payment, that is.

A December 2015 survey by the National Association of Realtors found that 94 percent of renters younger than 35 want to eventually buy a home.

Agencies like the Federal Housing Administration, Fannie Mae and Freddie Mac and California Housing Finance Agency offer programs for first-time buyers that can lower down payments. In Riverside County in 2014, the average down payment was 15.6 percent, according to real estate research firm RealtyTrac. More than a quarter of all down payments were less than three percent of the purchase price.

USC's Ramcharan explained that, while some buyers qualify for special programs like these, banks remain reluctant to lend to people with little savings or poor credit.

“I think it’s hugely different. I think it’s fundamentally different,” said Ramcharan, comparing today’s market to that of the bubble years ago. “During the boom, what we saw was lending standards falling quite sharply, because people tended to be very optimistic about… the path of house prices. Those expectations are no longer there.”

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Generation rent?

In that National Association of Realtors survey, 53 percent of young adults said they couldn't afford to buy homes. But the second most common answer, given by 19 percent of respondents, was that they simply weren't ready to commit to a house. Facing job and family changes, they needed flexibility.

And builders are starting to respond to demand. Between 2004 and 2006, around 12 percent of all units that received building permits in Riverside County were in duplexes or apartment buildings, according to census records. Between 2012 and 2014, these units made up 25 percent of the county's new housing.

Steve Huffman renovated two Palm Springs apartment complexes in 2015: Deepwell Apartments and Latitude 33, formerly Whispering Palms Apartments. The second property, which sits just a block from downtown's Indian Canyon Drive and has been largely gutted and rebuilt, asks $905 for studio units and $1,275 for two-bedrooms.

They're among the priciest rentals in Palm Springs, Huffman acknowledges. But he thinks the 121 units will be full in February.

"One thing Palm Springs lacked was multi-family housing that matched the new job base (brought in by) higher-end hotels," Huffman said. "The housing stock for renters is extremely old. We’re not targeting vacation rentals, we’re targeting people that live and work and call Palm Springs their home."

Included in this market are people Huffman calls "dual renters by choice" — professionals who rent apartments as weekend homes rather than buying condos. People who prefer to rent but still want a luxury feel "is a new phenomenon that, frankly, I think we’re creating," Huffman said.

Indeed, households earning $75,000 or more per year accounted for about 60 percent of growth in the renter population since 2011, according to Harvard's study.

In Alexis Ortega's eight-unit apartment complex, most renters are weekenders or snowbirds. Ortega said she doesn't want to rent forever, and a friend who's a real estate agent is trying to talk her into buying a condo. But she's worried about tying herself to an investment as large as a home, especially because she's not sure she wants to stay in Palm Springs long-term.

“For a while, the idea of buying a home didn’t really appeal to me," Ortega said. "But then, as you grow older, the idea of buying a home, if it’s well-priced... And there's the reality of being a person with a partner," she continued, trailing off.

"(Renting) works now," Ortega said. "I think the time when I start to think about other possibilities (will come), but I'm not able to make certain investments, like in real estate, now."

Rosalie Murphy covers real estate and business at The Desert Sun. Reach her at rosalie.murphy@desertsun.com or on Twitter @rozmurph.