The gap between rental costs and household income is widening to unsustainable levels in many parts of the United States and the situation could worsen unless new home construction meaningfully rises, it is claimed.
According to new research by the National Association of Realtors which reviewed data on income growth, housing costs and changes in the share of renter and owner occupied households over the past five years, renters are being squeezed in many metro areas.
This is due to the disproportionate growth in rental costs to incomes and New York, Seattle and San Jose, California, are among the cities where combined rent growth is far exceeding wages.
Lawrence Yun, NAR chief economist, said that the disparity between rent and income growth has widened to unhealthy levels and is making it harder for renters to become home owners.
‘In the past five years, a typical rent rose 15% while the income of renters grew by only 11%. The gap has worsened in many areas as rents continue to climb and the accelerated pace of hiring has yet to give workers a meaningful bump in pay,’ he explained.
He also pointed out that the share of renter households has been increasing and home ownership is falling. Those financially able to buy a home in recent years were insulated from rising housing costs since most take out 30 year fixed rate mortgages with established monthly payments.
Furthermore, a typical home owners’ net worth climbs because of upticks in home values and declining mortgage balances. The result has been an unequal distribution of wealth as renters continue to feel the pinch of increasing housing costs every year.
‘Meanwhile, current renters seeking relief and looking to buy are facing the same dilemma: home prices are rising much 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 down payment,’ added Yun.
NAR’s research analyzed changes in the share of renters and home owners, mortgage payments, median home prices, median household income for renters and the rental costs in 70 metro areas.
The top markets where renters have seen the highest increase in rents since 2009 are New York with growth of 50.7%, Seattle up 32.38%, San Jose up 25.6%, Denver up 24.14% and St. Louis up 22.26%.
Looking ahead, Yun says a way to relieve housing costs is to increase the supply of new home construction, particularly to entry level buyers. Builders have been hesitant since the recession to add supply because of rising construction costs, limited access to credit from local lenders and concerns about the re-emergence of younger buyers.
Yun estimates housing starts need to rise to 1.5 million, which is the historical average, yet housing starts have averaged about 766,000 per year over the past seven years.
‘Many of the metro areas that have experienced the highest rent increases are popular to millennials because of their employment opportunities. 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,’ he concluded.
This article was republished with permission from Property Wire.