The average American renter is now paying more than 30 percent of their income on housing, as wages have failed to keep up with rent hikes and affordable units remain scarce, a new report shows.
The nation is falling short of the demand for affordable housing by at least a million homes in some estimates.
The federal government defines rent-burdened as paying more than that 30 percent threshold.
The typical American renter now falls in that category, according to a recent report from Moody’s Analytics. This marks the first time that’s occurred in the more than 20 years that the ratings agency has been tracking the metric.
“If we’re looking at the low- to moderate-income families, they are taking 40 percent and above all of their income on the rent, even if the metro [area] itself hasn’t crossed that 30 percent line yet,” said Moody’s Analytics senior economist Lu Chen.
“This 30 percent is such a symbolic number … And I have to say we have been close to that 30 percent threshold for some time,” she added.
Many adults working full-time, still struggling with paying rent
While tenants in many U.S. cities have long spent at least 30 percent of their income on housing, the fact that this threshold has been passed at the national level marks a new milestone for housing affordability.
Jennifer Wells, a social worker in Bartholomew County, Indiana, told The Hill her rent has soared since 2016, while maintenance was scarce.
“In 2016, I moved into a two-bedroom, two-bath apartment and was paying $720 a month. And then the six years that I lived there, it was gradually raised to well over $1,000 a month,” Jennifer said.
Wells, a tenant leader with Hoosier Action, a housing advocacy group, said the problems with affordability continued.
“Absolutely no maintenance was done. The last year I lived there, there was no AC for two solid months and that was last year, we had a very hot summer,” she continued. “We were having to borrow AC units from friends, which was just causing my electric bill to skyrocket.”
Wells said she now rents a single-family home with her two adult sons who both have good jobs, but sky-high rents make living on their own impossible.
“None of us can do it by ourselves,” she said. “We kind of band together to try to make it happen.”
Rents are continuing to rise across the country
Rent growth has slowed in recent months, but median asking rents are still rising and jumped by 2.4 percent in January alone.
Some markets are seeing prices spike particularly sharply, with cities like Cleveland, Indianapolis and Raleigh, N.C., experiencing double-digit increases.
Fluctuating mortgage rates, incomes that fail to keep up with rent hikes, and a shortage of houses all contributed to reaching the threshold, though experts say the nation was nearing the mark for some time.
And the steady increase in housing costs has long been a more dire issue for lower-income families, even in areas where rent growth is relatively lower.
What’s behind rising rents?
Housing costs throughout the U.S. have risen steadily in the wake of the 2007-08 financial crisis and recession. Both rents and housing prices have been fueled by a long-term housing shortage, with home construction long lagging behind demand.
Although construction rates began to improve in 2021, the shortage has kept many would-be buyers as renters, putting more pressure on the rental market and driving up prices.
“We haven’t been building enough homes in either market. And that has led to either record low vacancy rates like we’re seeing in the market for homeowners, or very close to all time low vacancy rates in the rental market,” said Danielle Hale, chief economist at Realtor.com.
“In order to compete to find a place to live, Americans are having to fork over more of their monthly budgets.”
Renters interviewed for this article echoed that trend.
Chris Onder, a city employee in Philadelphia, recently moved after a pipe burst in their apartment, causing utilities to go up.
“Now I have to pay a higher rent just to have access to water,” Onder said. “When we had the pipe burst, we didn’t have access to water at all for a while.”
Rising rates set by the Federal Reserve are seeping into the rental market
High mortgage rates compound the problem, as those who want to transition to homeownership are locked out of that market, said Nicole Bachaud, a senior economist at Zillow.
The benchmark mortgage rate is ticking up again after falling below 6 percent in early February for the first time since September. New data released by Freddie Mac last week shows 30-year fixed mortgage rates increased for the second consecutive week, averaging 6.32 percent.
Near their peak, average rates drove up monthly mortgage payments by nearly 50 percent from 2019 levels. This brought the typical payment to more than $1,800 each month, according to a report from the National Association of Realtors.
“We’ve seen mortgage rates going way up, and now that mortgage payment is much higher than rent in most of the country,” Bachaud said.
Effects from the pandemic are lingering with renters
During the height of the COVID-19 pandemic, renters were more likely to be employed by industries impacted by job loss and financial instability, two factors that negatively impacted incomes, Bachaud said.
And the crisis intensified when those with resources left high-density areas for smaller markets with abundant space and less expensive homes.
However, when lockdowns began to ease and offices started requiring employees to return to in-person work, rental prices in more populated areas crept higher.
“Nationwide, we were seeing rents grow faster for the first time in urban areas than we were seeing in suburban areas,” said Hale, the Realtor.com economist.
While the national average rent-to-income ratio reached 30 percent in the final months of 2022, Moody’s data shows the ratio topped 68 percent in the New York City metro area.
How rising incomes, inventory boosts could help
Bringing the rent-to-income ratio back beneath the 30 percent threshold will require changes to one or both sides of that equation: Rent prices or wage levels.
A spate of new building could also help drive down rent prices by supplying an increase in available housing.
As more families are priced out of home buying, builders are turning to construction of multi-family units that are more conducive to renting. A new record amount of multi-family units are under construction for the fourth month in a row, data from Realtor.com shows.
Experts also expect to see the shelter-based piece of inflation, or the government’s measure of housing costs as part of its measure of inflation, slow in the coming months.
“Relief is on the horizon. But it’s not going to be immediate for most families,” Hale said.
If incomes were to rise substantially, that growth could also play a role in pushing the typical American below that 30 percent rent-to-income ratio. A recent Zillow report found rent affordability is better in cities with minimum wages higher than the federal rate of $7.25 an hour.
In cities with minimum wages above $7.25 it takes an average of 2.5 full-time minimum wage workers to make the typical two-bedroom rental affordable, meaning renters would spend no more than 30 percent of their income on rent.
In cities with a $7.25 minimum wage, it takes an average of 3.5 full-time workers to meet this threshold.
“Income disparity does really play a big role and impact the affordability outlook for a lot of renters,” Bachaud said.
And while higher incomes could drive up rents, they could also allow renters to better afford units.
Is any relief for renters in sight?
Several moves from the federal government could also help improve the situation.
In January, President Biden introduced a “Blueprint for a Renters Bill of Rights.” The initiative includes a set of principles aimed at making rents more affordable and strengthening tenant protections.
As part of the blueprint, several agencies agreed to actions to improve housing affordability and access. These could include curbing rent hikes for certain properties or addressing practices that prevent consumers from retaining housing.
The U.S. Department of Housing and Urban Development will also award $20 million to fund nonprofits and agencies providing legal assistance to low-income individuals at risk of eviction.
The release follows the Department of the Treasury’s reallocation of nearly $700 million to assist renters facing financial hardship in January. The allotment was made thanks to the 2020 Federal Emergency Rental Assistance (ERA) program, which has reallocated more than $3.5 billion to families since the program’s inception.
Rents are expected to stabilize over the next year as new construction is expected to increase the number of available units. Some experts, however, are pessimistic that any of these initiatives will cause rents to fall, rather than just rise at a slower rate.
Rents will likely stay high for a while
Large-scale price drops are not likely on the horizon, said Thomas LaSalvia, director of economic research at Moody’s Analytics, in an interview with The Hill.
For the time being, the U.S. labor market is not undergoing such stress. It posted surprisingly strong numbers in January, adding 517,000 new jobs. This brought the nation’s unemployment rate to 3.4 percent.
A real drop in rents will take labor market stress like “spells of unemployment, as a strong economy supports rent growth and overall household formation,” he said.
“And without that, there is really no significant reason that we should see a substantial pullback in rent. The demand will be still strong enough. Even if this is going to be a record year of supply … it takes real labor market stress, significant labor market stress, to push rent down,” he added.