A popular narrative of the U.S. housing market has been that big city prices are locking out young buyers, feeding a cycle in which a growing number of people are forced to rent at ever higher rates as demand overwhelms supply. Throw in the fact that wages haven’t kept pace, and you have a world where a wide swath of Americans can't save enough to ever buy that first home.
The reality may be a bit more complicated. It's true that, when combined with a lack of government support for affordable housing, this situation has pushed the number of cash-poor renters to a new high. Some 26 percent of U.S. renters paid at least half their income to landlords in 2014, up from 20 percent in 2001, according to the State of the Nation’s Housing report, published on Wednesday by Harvard’s Joint Center for Housing Studies.
On the other hand, the number of homeowners who are severely cost-burdened by mortgage payments (paying 50 percent or more of their income) or moderately cost-burdened (paying 30 percent to 50 percent) actually fell from 2013 to 2014, the JCHS study said. And while the poorest renters are more likely to find themselves in dire straits, data compiled this month by Greg Willett, chief economist at property management software maker RealPage, suggests that market-rate renters1 are keeping up with those rising rents, and are thus able to put some money away for that eventual first purchase.
The median rent-to-income ratio (derived from 4 million apartments tracked by RealPage) has hovered between 22.9 percent and 23.3 percent since 2010. While rents increased over that period, so did the median income of market-rate renters, which rose from $44,000 in 2010 to almost $58,000 so far this year. That’s partly because incomes have risen faster for more affluent renters, Willett said, and partly because changing home-buying behavior has kept higher earners in the rental pool longer.
Those trends have been good for landlords, and they show that most renters are able to find apartments that fit their budgets. The poor, however, are still bearing the brunt of a tight market: The availability of affordable housing falls at the lower end of the market-rate segment, creating greater affordability challenges in lesser-quality apartments. For the bottom tier of rental units, described as "Class D" in the chart below, the median renter is spending more than 30 percent of his or her income on rent.
Plenty of renters remain cost-burdened, and some of them earn good salaries. In 2014, 399,000 households earning $75,000 or more paid at least 30 percent of their income in rent—a number that probably skews to hot markets such as New York or San Francisco. About 1.7 million households earning from $45,000 to $75,000 were moderately rent-burdened during the same period.
Farther down the income spectrum, there’s simply not enough supply to meet demand: More than 10 million renter households earned 30 percent or less of the area median income in 2014, and only about 5 million apartments were cheap enough for those renters to afford. New market-rate construction tends to focus on luxury renters, and lower rents take time to filter down. More than 1 million new households were created in 2015, compared with 620,000 new homes built, according to new research from the Urban Institute. The shortfall of 430,000 units put more pressure on housing prices, especially at the bottom of the market.
While the number of poor households has risen steadily over the past 30 years, the number of those households getting rental assistance has remained flat, as the chart above shows. Federal funding for subsidized rental apartments hasn’t increased in 15 years.
“It’s an environment that’s gotten really, really challenging for people at the bottom end of the spectrum,” said Willett. “The story tends to be generalized that’s it’s tough for all rental households. The top-earning groups have not been particularly challenged.”