NEW YORK, NEW YORK – DECEMBER 05: A window cleaner works in a high rent district in Brooklyn on … [+]
Moody’s Analytics, the financial and economic analytic branch of bond credit rating firm Moody’s Corporation, came out with a surprising and disturbing observation recently.
The concept of being rent-burdened means people spend at least 30% of their income on housing. Moody’s found that for the first time in tracking the issue for 20 years, the national average rent-to-income ratio (RTI) reached 30% in the fourth quarter of 2022. That was up 0.2% from the third quarter, or 1.5% year over year.
Class is a real thing in the U.S., despite how often as a nation we talk about the ability to move up in the world, to do anything so long as we’re willing to work hard enough. Historically, from the very first settlers, utter rot. The new observation about income and rent is only a reaffirmation.
The U.S. is a nation with a rent-burdened class. These are people who will struggle, no matter how hard they work, because their income cannot keep pace with the cost of having a place to live. The Federal Reserve Bank of St. Louis put together some illustrative graphs, showing the ongoing oppressive economic pressure. First, a graph showing the increase of renting a primary residence in a number of specific metropolitan areas as well as the U.S. average and the Consumer Price Index (CPI) measure of inflation.
Examples of rent growth compared to inflation.
Notice in particular the purple line about halfway up the graph representing the growth in rent cost in the average U.S. city and the light blue line at the bottom, which is CPI. For many years, rents have raced ahead of most other costs of living.
But things have become even harder because fewer people are able to buy houses, lock into a 30-year mortgage, and then see their income grow while the monthly payment remains fixed. This alone is a wealth building mechanism. Not because the value of the domicile increases, which it eventually does over time, but because, for the vast majority of owners, the mortgage puts a damper on how much more that expense can become. Yes, there are repairs. Yes, local property taxes may increase. But the biggest portion of costs doesn’t change. You are off that particular treadmill of having to earn more every year to keep pace with the price of an apartment.
As Moody’s noted: “Rising mortgage rates caused many households to be priced out from home buying and would-be buyers to remain renters. Apartment demand surged as a result and drove rates sky high.”
Here’s another graph from the St. Louis Fed. It shows the national house price index divided by the consumer price index for average metropolitan rents in the U.S.
House price versus rent growth.
We’ve already seen that rents have outpaced inflation for many years and that the gap has only increased over time. The home price-to-rent ratio is a multiplier. To own a house that would eventually let income grow beyond home costs now means not an initial jump of maybe 10% or 15% a month as it was in the past, and not a 30% jump in 2019, but a 68% increase in the third quarter of 2022, the most recent numbers available.
Squeezing out a bit more is one thing. But now, home ownership means a nearly 70% sudden additional amount plowed every month into a mortgage. It’s too big a leap to let most people tighten their belts a bit and make the jump that can eventually let them get ahead, maybe for the first time in their lives.
Moody’s went into detail of the ups and downs of rent burden and income in varying metropolitan regions. Some are better off, some worse, but all recent changes are small adjustments to an unsustainable reality.
This isn’t going to change in the near future for a number of reasons. It would take much more home inventory to cause prices to start falling. But builders have scaled back because they couldn’t get enough buyers to support the level of new construction. Existing homes are locked up because people with a sub-4% mortgage are not the most likely to sell and move into a new house and mortgage with a much higher interest rate and monthly expenditure. And prices are still so high that relatively few people can pull together the necessary down payment.
It’s a vicious circle and one that is unlikely to be solved by the invisible hand of the market.
