The Joint Center for Housing Studies of Harvard University produces independent data and reports on the US housing market. These are often the sort of lengthy reports reviewed by the industry and generally ignored by the public and the press, but the information they contain speaks volumes about our housing market and what we can expect in the future.
Across America, the number of renters has been steadily increasing, particularly in the wake of the housing crisis. Also rising at a deeply concerning level is the number of severely cost burdened renter households. These are people whose housing costs exceed fifty percent of their household income.
To put that in context, the commonly accepted rule of thumb is that total housing expenditures should be less than thirty percent of household income. Renters who are severely cost burdened are in a position of spending half and often up to sixty percent of household income on housing, which sets them up for failure because it’s simply not sustainable.
As you can see, certain types of households are more at risk to become severely cost burdened. Interestingly enough, there is significant crossover with a number of groups who received loans that should not have been made prior to the mortgage crisis.
Foreclosed homeowners who have become severely cost burdened renters are hit from three directions: Losing their equity, spending unsustainable portions of income on housing, and having a deficiency judgement against them for the mortgage balance after foreclosure or short sale.
What’s worse is that post-foreclosure deficiency judgements often lead to enforcement activity such as wage garnishments. Such processes make certain assumptions about income and expenses, and may not allow for the inclusion of the additional nonstandard costs borne by these types of renters.
These foreclosed former homeowners have difficulty purchasing a new home, and many of them have been putting money into trying to save their home rather than saving the money for when the inevitable happens. That puts them in a position of waiting until the last moment when the home is sold and then taking whatever rental housing they can find that is close to jobs, schools, childcare, and other necessities – without regard to the cost of that housing long-term.
In addition, these factors have led to an increase in the size of households. Living at home is now the most common option for adults 18-34. The resulting need for additional space in rental housing drives up costs, often without a significant increase in household income because the Millennial has trouble finding work in their field.
The trend is predicted to continue as rent growth outpaces income growth on a national level. A baseline scenario assumes that both grow equally at an assumed rate of inflation of two percent per annum. For context, that baseline two percent is the same as the inflation target of the Federal Open Markets Committee, the point at which they believe the economy is growing at a “safe” rate. With just two percent per year growth in both wages and housing costs, the number of renters who are severely cost burdened would increase by 11%.
When rent and income growth do not match, the numbers quickly become more concerning.
- Rents growing one quarter percent faster than incomes causes a 14% increase in severely cost burdened renters (13.5 million).
- At a full one percent spread between rent growth and income growth, the number of renters who cannot possibly afford their housing grows by 25% (15 million).
- The JCHS study contemplates households not individual renters. This means that up to sixty million Americans could be impacted by the increase.
When rents rise faster than incomes, who loses? The unfortunate answer is that everyone loses.
In any scenario where cost growth outpaces income growth, eventually some portion of the population is unable to afford their housing. A homeowner who finds themselves in trouble with the mortgage frequently has somewhere between six and twelve months to cure that default.
When they become tenants, however, those built-in protections essentially disappear. Landlord-tenant law developed to protect the housing of American families, while protecting the ownership interest of the landlord. The thirty days at most that a tenant has to cure a default in many parts of the United States attempts to strike a balance between those competing interests.
In some areas, time to recover would be even less. Some large cities might allow longer, but these are the exception rather than the rule. Rent increasing faster than income is a guaranteed recipe for an increase in the number of defaults, which puts further stresses on the rental housing market.
Landlords and property owners, of course, also lose when renters become severely cost burdened. They lose money when a tenant can’t pay, of course. Landlords also lose because many smaller landlords took advantage of the mortgage crisis to purchase additional properties by leveraging existing assets. Often, those new assets were leveraged to purchase additional units. In those situations, tenant default can quickly lead to landlord default.
A landlord who isn’t able to pay their mortgage certainly isn’t likely to maintain the premises. Smaller landlords who are in precarious positions with their mortgages are less likely to screen tenants effectively, out of a misguided desire to create cash flow by accepting any tenant at all.
The results can be disruptive to other residents at best, and dangerous at worst. Accepting tenants out of desperation also significantly increases the chances the new tenant won’t pay, worsening the situation dramatically for the landlord.
When landlords are at risk of losing their properties because the cost burden of renters just keeps increasing, that’s bad for the economy as a whole. Potentially, it also raises the question of whether those loans should have been made to those landlords. Answered in the negative, the question could allow Fannie and Freddie to force repurchases of significant mortgages by the originating banks.
In other words, the combination of loans made post-mortgage crisis on rental properties and a drastic number of severely cost burdened renters could trigger another financial crisis, albeit a somewhat smaller one. It is only in recent days that the Fed has spoken of the possibility of increased interest rates, another mortgage crisis would be very bad news for the economy as a whole as well as for international confidence in the United States.
A number of solutions have been proposed, but few of them make everyone happy. The problem isn’t just rising rents, either. In many areas, all costs are rising.
Georgia is a perfect example. In Atlanta, the median rent has risen by over a thousand dollars annually just in the last twelve months. The cost of gas and commuting is back up, and food prices have certainly not dropped.
Saving for college is a bigger chunk than ever of family income, and the list goes on. The inherent problem is that wages are not keeping pace with those numbers, so households and families are squeezed more tightly year over year.
Renters who are severely burdened by housing costs are also the very people least able to afford to recover after a fire, a theft, or another type of loss to their property. Fortunately, one of the few things that hasn’t increased significantly in price in recent years is Atlanta Renters Insurance. While the price traditionally is just a bit over the national average, policies often cost as little as $20 per month and can be acquired in just minutes.
The more financial risk your family faces, the more they deserve the protection of renters insurance. To find out just how affordable it is, just call (800)892-4308 and you can be covered quickly with affordable Georgia Renters Insurance.