With Rising Incomes, Renter Cost Burden Shows Slight Improvement for Now

While rental housing costs remain high, the accelerated improvements in the U.S. economy have resulted in incomes that are rising slightly faster than rents.

Recent Movements in Housing Costs and Rising Household Incomes

Housing costs typically constitute the largest share of household expenditures. As a percentage of income, the costs reached record levels as the U.S. unemployment rate hit rock-bottom by year-end-2010.

Since then — consistent with the broader economic recovery — the cost burden of housing has improved slightly on the heels of steady job gains and rising worker incomes.

A closer examination of the latest Census American Community Survey (ACS) rental market data shows that while average rents in small apartment buildings increased at an annual rate of 3.7% over 2014 to 2016, average household incomes went up 4.8%, as shown below.

In comparison, income and rent movements were similar in large apartment buildings, while single-family rental households experienced an even greater net-spread.

Housing Cost as Share of Income, the New Normal

While the general pre-crisis rule of thumb had been that rental costs should not exceed 30% of household income, this mantra is quickly becoming a relic of the past.

As shown below, the average gross rent share of income in small apartment buildings reached 40.2% by 2014, declining to 39.2% by year-end-2016, due to accelerating income growth, as described earlier.

Across the rest of the rental market, large building renters experienced the highest cost-burden amongst all sub-groups. This group spent on average 41.6% of income on rent in 2014, declining marginally to 41.3% in 2016, as compared to the one percentage point drop in small buildings over the same period.

Furthermore, despite single-family rentals commanding relatively high rents, renters in these properties were relatively less cost-burdened at 37.4% share of income in 2016.

With the improving economy, housing cost burdens have seen some improvement across the U.S. rental market. That being said, a continued focus on improving affordability within all rental assets is warranted given that no group is spending less than a third of their income on housing.

Moving back towards the 30% housing cost rule of thumb provides an opportunity for a more stabilized economy, with renters being able to save and spend more.