Renter Affordability and Income (September 2011)


The recovery in the rental sector and the ensuing increases in rents have led to increasing media and policymaker attention to rental affordability.  The latest rental housing report by Harvard’s Joint Center for Housing Studies found that the number of renters paying more than half their income for housing has reached record levels and was already increasing before the Great Recession.  


A previous issue of Research Notes (June 2011) showed that compared with overall inflation, rent increases actually have been fairly small over the last two decades.  By contrast, renter incomes have actually decreased, which is what has hampered renter affordability.  


This issue explores renter incomes in more detail to confirm that our affordability issue is not really a housing problem, but an income problem.  That is, it’s not that rental housing has gotten so expensive, but rather that the income of too many renter households is too low to afford rents that the market can reasonably offer. 


The Affordability Picture


The conventional measure of housing affordability is simply the ratio of housing costs to income.  While there is no “right” level of housing costs, households are generally considered to have “moderate burdens” if their housing costs exceed 30 percent of their income; they are considered “severely burdened” if costs exceed 50 percent of income.  The moderate burden standard has actually increased over time.  It was initially 20 percent as established by the National Housing Act in 1937.  In 1969 it was raised to 25 percent, and in 1981 to 30 percent. 


For renters, housing costs consist essentially of rent plus utilities.  The table below illustrates that renter housing costs have a long history of rising relative to incomes.  The total number of renters with some level of cost “burden” has risen from under a quarter in 1960 to nearly half by 2009 (the most recent data available). 


Renter Affordability: Share of All Renters with Housing Cost Burdens


Housing costs as share of income


1960


1970


1980


1990


2000


2009


30-50% (moderate burden)


11.9%


13.0%


17.7%


19.6%


18.4%


22.6%


Over 50% (severe burden)


11.9%


14.0%


17.8%


19.4%


19.7%


26.1%


Total


23.8%


27.0%


35.4%


39.0%


38.1%


48.7%


Source: Joint Center for Housing Studies, America’s Rental Housing, 2011.


While the 2009 figures partially reflect the severe downturn following the bursting of the housing bubble, it’s clear that the increasing share of renters whose housing costs eat up more than 30 percent of their income began long before the most recent recession.  And it’s not just more households facing burdens, but that the magnitude of the burdens has worsened over time.  More renters today (26.1 percent) face a severe burden than had either a moderate or a severe burden in 1960 (23.8 percent).


This yardstick has some obvious limitations.  First, it does not take into account housing quality.  Higher housing costs may reflect better housing.  Second, it does not distinguish between households that purposely choose to spend more on housing and households that cannot find less expensive housing.   For example, one household might choose more expensive housing—but less expensive vacations— and be characterized as “burdened” by this measure.  If, however, they chose less expensive housing—and spent the money they saved on more expensive vacations—it would no longer be “burdened.”


One other point bears noting, namely that despite the expansion of affordability problems, it remains mainly a problem of lower-income households.  More than 80 percent of renter households in the bottom income quintile pay more than 30 percent of their income for housing—and more than 60 percent pay more than half their income for housing.  By contrast, only about one percent of households in the upper three quintiles have housing costs that eat up more than half their income.


Household Income


If renter affordability has worsened, and if rents haven’t been the culprit, it stands to reason that the problem stems from the income side.  And indeed, incomes of renter households have not kept pace with inflation or with overall household income growth.  Notwithstanding the cyclical pattern, the clear trend is down: the median income of renter households is lower now than it was 10, 20 or 30 years ago.  


 


RN 2011-09-1


The relation between growth in median renter income and in median income of all households hasn’t changed much over the years.  For the three 10-year periods ending with 2009, median renter income growth has trailed overall median income growth by an average 52 basis points (bps) annually.  Interestingly, median renter income (measured in 2009 dollars) has actually declined in all three periods, while the median for all households declined only in the most recent period.


Growth of Real Median Household Income
(average annual percentage change)


Time Period


All Households


Renter Households


Difference


1979-1989


0.28%


-0.23%


51 bps


1989-1999


0.49%


-0.15%


64 bps


1999-2009


-0.54%


-0.95%


41 bps


Source: Census Bureau.


It’s not entirely clear why renter income has underperformed overall household income.  Among the possible culprits:


  • Overall household income inequality has been increasing.  From 1979 to 2009, the share of all income going to households in the top fifth rose by 6.1 percentage points (from 44.2 percent to 50.3 percent), while the share of total income going to households in the bottom two-fifths fell by 2.3 percentage points (from 14.3 percent to 12.0 percent). Since more renter households are in the lower fifths than the top, this means they are losing ground with respect to households overall.  The cause of this trend is under debate.
  • Changes in renter household composition—such as smaller or younger households—not mirrored in the population generally may explain some of the difference.
  • As homeownership expanded beyond the level attainable under traditional underwriting guidelines, more renters with incomes above the median (for renters) may have been siphoned off into the ownership ranks, causing the median income for renters to decline, even if actual incomes of remaining renters were unchanged.  There seems to be some evidence for this.  Indeed, this compositional shift seems to have caused a statistical anomaly: in many years, the median income of both renters and owners grew more slowly than the median income of all households.

Whatever the explanation, the point is that the basis of our housing affordability problems is on the income side of the equation. This is the context within which policy decisions about rental affordability ought to be made.



Questions or comments on Research Notes should be directed to Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist, at mobrinsky@nmhc.org or 202/974-2329.