The gap between household income and rental costs is increasing to unsustainable levels in many parts of America, according to the National Association of Realtors (NAR) which indicates that the situation will continue to decline “unless new home construction meaningfully rises.”
Why care about renters?
NAR’s Chief Economist, Dr. Lawrence Yun notes that when this gap widens to “unhealthy levels,” it makes it more and more difficult for renters to become homeowners. Equally challenging is the rise in the share of renter household as homeownership levels fall.
“In the past five years, a typical rent rose 15 percent while the income of renters grew by only 11 percent,” Yun observed. “The gap has worsened in many areas as rents continue to climb2 and the accelerated pace of hiring has yet to give workers a meaningful bump in pay.”
Unequal distribution of wealth
The NAR is observing an unequal distribution of wealth, and it has nothing to do with politics. The study points out that home values have risen and mortgage balances have declined, putting homeowners net worth on an upward trajectory as renters “feel the pinch of increasing housing costs every year.”
Dr. Yun adds that renters hoping to become homeowners are daunted by home prices rising faster than their incomes. “With rents taking up a larger chunk of household incomes, it’s difficult for first-time buyers – especially in high-cost areas – to save for an adequate downpayment.”
Which markets are being squeezed?
The markets where renters have seen the highest rent increases since 2009 are:
- New York City (50.7 percent)
- Seattle (32.38 percent)
- San Jose, CA (25.6 percent)
- Denver (24.14 percent)
- St. Louis (22.26 percent)
NAR’s research analyzed changes in the share of renters and homeowners, mortgage payments, median home prices, median household income for renters and the rental costs in 70 metro areas.
Going forward; what’s next?
NAR is looking for home builders to increase their supply (reasonably, of course), which would relieve housing costs and allow more entry-level buyers (renters) into the market.
So why haven’t builders just magically towed the line? Dr. Yun recognizes that they have been hesitant since the recession because of “rising construction costs, limited access to credit from local lenders and concerns about the re-emergence of younger buyers.”
He asserts that housing starts need to rise to 1.5 million to the historical average. To put that in perspective, starts have averaged at 766,000 per year for the last seven years.
“Many of the metro areas that have experienced the highest rent increases are popular to millennials because of their employment opportunities,” notes Yun. “With a stronger economy and labor market, it’s critical to increase housing starts for entry-level buyers or else many will face affordability issues if their incomes aren’t compensating for the gains in home prices.”