The apartment industry’s strong rebound has garnered much attention in the time since the recovery began in 2010. After a modest slowing in rent growth in 2013-wrongly interpreted in some quarters as a sign that the expansion was getting long in the tooth-strengthening demand pushed rent growth back up. In each of the last two quarters, the average same-store rent nationally increased 4.5 percent to 5.0 percent. And in some high-cost metro areas like San Francisco, rents have been rising at a double-digit pace for some time.
Rapid rent growth-or simply high rents (as is the case in places like New York City)-has underscored the issue of housing affordability, especially in rental housing. However, closer analysis of affordability data shows that affordability challenges are more tied to income growth hurdles than housing costs.
Background on Affordability
Media reports often focus just on the high end of the market-highlighting rents for luxury apartments or higher cost areas with relatively higher rents-or where rents are rising the fastest. And affordability is often framed in the context of homeownership: Is buying now cheaper than renting? But affordability is really about housing costs in relation to income. And it isn’t only about renting; housing affordability is an issue for homeowners (and would-be homeowners) as much as for renters.
Conventionally, there are two affordability markers: (1) housing costs over 30 percent of household income are said to be a “burden” and (2) those over 50 percent a “severe burden.” While these are somewhat arbitrary figures (and unnecessarily loaded terms), these ratios can still be useful indicators of trends.
The latest data from the biannual American Housing Survey (AHS) show that, in 2013, there were 39.4 million households whose housing costs exceeded 30 percent of their income. Of those, 20.0 million had housing costs greater than half their income. Figure 1 shows that the shares of all households with high housing costs rose steadily through 2011, although they have edged down a bit since then.
The Role of Housing Type, Tenure and Income
Figure 2 compares the share of households whose housing costs exceed 30 percent of income for apartment renters, single-family owners and all households. Affordability among apartment households continued to worsen through 2011 before declining significantly in 2013. Among single-family homeowners, affordability was essentially flat between 2009 and 2011 before declining in 2013. More important, the share of households whose housing costs exceed 30 percent of income was much higher for apartment renters than single-family owners or for all households: 53.2 percent for apartment renters in 2013 compared with 27.9 percent for single-family owners and 36.2 percent for all households.
However, this does not mean that apartments are less affordable than single-family homes. Affordability depends on both housing costs and incomes. Adjusting for income produces a much different picture of affordability. Figure 3, for example, looks only at those households making at least 80 percent, but less than 100 percent, of the area median income (AMI), a group policymakers often identify as moderate-income households.
In this case, the share of apartment households spending more than 30 percent of income on housing costs is lower than the share of single-family homeowners paying more than 30 percent of their income for housing throughout this period-averaging 1,355 basis points (bps) less. That narrowed in 2013, but it was still a substantial 531 bps spread. This turns out to be the case generally, as illustrated in Table 1. There is only one income-to-housing cost combination-those with 30-59 percent of AMI and housing costs of more than 30 percent of income-where the percentage for apartment households is higher than for single-family homeowners. In all other cases, either the apartment renter share is similar to that of single-family owners or the apartment share is significantly lower.
The reason that Figure 2 shows that high housing costs are more common in apartment households than among single-family homeowners is compositional; more apartment households have incomes in the lower AMI categories than single-family owners. Thus, affordability issues are more about income and less about whether a household rents versus owns or lives in an apartment or a single-family house.
Case in point: Only a small share of households with incomes of at least 80 percent of AMI have housing costs that eat up more than 50 percent of their income-regardless of the type of housing. Similarly, among those with 120 percent or more of AMI, only a small share pay more than 30 percent of income for housing.
At the other end of the spectrum, almost 90 percent of all households with incomes under 30 percent of AMI have housing costs of more than 30 percent of income; three out of four of these households have housing costs totaling more than half their income. This should come as no surprise: 30 percent of the median household income nationally is only $15,600. To keep housing costs under 30 percent, those costs could not exceed $390 per month. That’s a significant challenge in many markets no matter if a household rents or owns.
Long-term income stagnation has exacerbated the problem. Adjusted for inflation, the median household income today is virtually the same as it was 25 years ago. Unfortunately, housing costs are not the same. Real house prices have risen by more than ten percent, while real rents are six percent higher. That may not seem like much of an increase over such a long time frame, but it is enough to intensify affordability problems when income growth has stalled.
Almost 40 million households pay more than 30 percent of their income for housing, and 20 million of them pay more than 50 percent. Of that latter group, 19.3 million make less than the area median income and 18.7 million make less than 80 percent of AMI. While this shows up as a problem of housing cost, the underlying problem is one of income. For that reason, it is difficult to address the affordability challenges solely through housing. New, market-rate housing costs more to build and operate than those making less than 80 percent (much less 60 percent or 30 percent) of AMI can afford to pay.