How Big is the Rent Affordability Problem?

Rents in the United States have been rising faster than incomes for several years, demanding a larger share of household budgets. In fact, nearly one-third of American renter households contribute 50 percent or more of income towards rent.

Are Small Asset Rentals Less ‘Severe’ on Renter Budgets?

Following the definition used by the Harvard Joint Center for Housing Studies (JCHS) in their recently released 2016 annual report, “State of the Nation’s Housing”, we examine two categories of cost burdened renters – Moderately Burdened and Severely Burdened households.

Moderately Burdened households are those paying between 30 percent and 50 percent of their household income towards rents, while Severely Burdened households pay 50 percent and up.

About 25 percent of households in small properties (5 to 49 units) fall in the Moderately Burdened category, slightly higher than the 24 percent share in large properties (50+ units).

Measuring renters that are severely burdened, the share is slightly higher for households in large properties (30 percent) than small properties (28 percent). Overall, the share of households that are Moderately or Severely Burdened is only slightly higher for large property renters.

As shown by comparing the two charts below, the affordability issue in small properties is experienced to a greater degree by lower income households. Severely Burdened households are mostly concentrated in the lowest income groups in both asset types.

Which Markets have the Biggest Affordability Problem?

High cost burdens for households living in small properties is characteristic of many metro areas. In some cases — like New York for example — incomes are high but rents are relatively higher. In other cases, such as Baltimore, rents may be low but incomes are even lower on a relative basis.

As shown in the chart below, the share of Severely Burdened households living in small assets was higher than the national average for Seattle (29 percent), New York (31 percent), Baltimore (34 percent), Los Angeles (35 percent) and Atlanta (38 percent).

The picture changes significantly in the large property market, where the share of households in New York that are severely burdened drops below the national average. Larger assets come with luxury finishes and comprehensive amenity packages in many instances, so rents are high — but incomes are relatively higher. Similarly, in San Francisco, high rents are offset by high incomes at large properties.

From the landlord’s perspective, cost burdens for households in small properties are likely a constraining factor in raising rents further. Notably, the analysis above does not consider property quality.

In some markets where burdens are low, the low quality of the small property rental stock will constrain rent growth as well. In order to raise rents at a low quality asset, investors should look consider value-add repositioning strategies.