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Rent Affordability: How Do Incomes Stack up to Rents, Since 2000?

by Editor | ezLandlordForms

(graph courtesy of The New York Times)

There has been a lot of attention paid to rising rents in the last few years, but how do incomes stack up?  Are rents outpacing incomes in America?

First, a note on inflation: to compare rents and incomes from different years, we have adjusted all dollars to 2014 dollars, so that inflation does not impact either income or rent numbers at all.  The numbers below reflect current dollar values.

Adjusted median incomes have actually decreased 3.1% since the Great Recession ended in 2009 (you read that correctly – since the economy started improving). For economists who have been flabbergasted as to why half of Americans still think the U.S. is in a recession, when the recession ended five years ago, inflation-adjusted incomes should provide a straightforward explanation.  (In a recent poll co-conducted by NBC and The Wall Street Journal, 49% of respondents stated that they believe the United States is currently in a recession, a troublingly high number considering that the recession ended in June 2009.  As a refresher from ECON 101, the technical definition of a recession is a period of decline in gross domestic product [GDP] lasting at least two consecutive quarters.)

The news unfortunately worsens from there.  Not only are median incomes lower today than they were five years ago, but they are also lower than they were ten years ago, and lower still than they were at the start of the millennium in 2000 (see the graph above).

The good news is that, after reaching a millennium low in late 2011, inflation-adjusted incomes have been on the rise over the last two and a half years.

As for rents, the news for renters is better than they might expect, and not so impressive as landlords may have thought.  While inflation-adjusted rents are up 13.9% since 2000, that growth occurred almost entirely in just the first two years.  Rents have been fluctuating around $750 (in 2014 dollars) since 2002, and in the second quarter of 2014 sat at $756, almost exactly the same as 2002 (when the median asking rent was $750).

Looking at inflation-adjusted rents since the Great Recession ended in 2009, rents are actually 3.9% lower today at $756 than they were in 2009 ($786).

So why the perception that rents are increasing so dramatically?

One obvious answer is that if inflation-adjusted incomes are down, then even rents that only rise to match inflation will seem to be increasing, as rents are making up a higher percentage of Americans’ incomes.  Many pundits refer to this as the “affordability gap”: incomes stagnating or declining, while rents and inflation rise.

To delve slightly deeper into this affordability gap, consider that most personal finance experts recommend that renters do not take on a lease agreement with rent comprising more than 30% of their household income.  In 2000, 38% of U.S. renters were paying more than 30% of their household income towards the rent, whereas a recent Harvard study found that in 2013 a full half of renting households were spending over 30% of their income on rent.

The second reason there is a perception of skyrocketing rents is a little more subtle.  In major cities, rents have grown much faster than overall rents in the U.S., while rural rents have remained flat or declined.  Rents in major cities are far more publicized, and are more commonly tabulated by research firms.  Consider all the publicity over rents in San Francisco, which have risen a shocking 19.1% from $3,023 in June 2013 to $3,600 in June 2014, according to Priceonomics.  But no one talks much about the rents in rural Kansas.

Research firms often only track larger cities’ rent data, ignoring rural areas, towns and most small- to mid-size cities.  The biggest company that tracks residential rents, Reis Inc., compiles data for the top 79 metropolitan areas in the country, and even then they only track apartment rents, not all rents, so their numbers end up being far higher than Census Bureau numbers.  This creates a perception that nationwide rents are skyrocketing, which is simply not true – at least not when looking at all Americans, and not just those living in major metro areas.

So where is rent affordability headed?  Among economists, there is cautious optimism that the U.S. economy has reached an inflection point in income and employment growth.  In July, employers added 209,000 jobs to payrolls, which marked the sixth straight month that employers added more than 200,000 jobs/month (for context, the last time there was a six month streak of 200,000+ jobs added per month was in 1997).  The long-term unemployed (defined as Americans looking for a job for 27 or more weeks) fell to 3.16 million last month, down a dramatic 25.6% from 4.25 million in July 2013.  But 3.16 million is still a disturbingly high figure (in December 2007, the number of long-term unemployed was only 1.32 million).

Jobs have grown by over 1.09 million this year, strengthening the U.S. economy, but the nation’s 6.3% unemployment rate remains higher than a healthy economy’s unemployment rate of 4.5-5%.  The next step will be income growth, which will allow for further economic growth, lower rental vacancy rates and perhaps higher asking rents for landlords (beyond merely keeping pace with inflation, as they have for the last twelve years).

What’s your perception of rents versus incomes over the last decade?  Where do you think the U.S. is headed, economically?

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