Housing affordability in the U.S.

April 3, 2017
By Kevin Wright/ Editor


tenmagazineRental housing has become less affordable at the national level due to a variety of economic reasons. The fallout is that many renters’ incomes are not keeping pace with rental prices.

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When rental costs rise faster than the rate of inflation, it can pose a challenge in terms of housing affordability. But when renters’ incomes can’t keep up with rising rent prices, affordability suffers even more. It’s this latter measure—people’s ability to afford rising rent prices when their incomes decline, become stagnant or don’t increase at the same rate as rent—that is most telling.

“By this measure, rental housing has indeed become less affordable at the national level,” Senior Economist Kelly Edmiston of the Kansas City Fed explained in his recent research “Residential Rent Affordability across U.S. Metropolitan Areas.”

Median residential rent rose at an annual rate of 2.3 percent nationally from 2010 to 2015. When Edmiston adjusted that figure for inflation, annual median rent grew by 0.6 percent. But as median rent grew, personal income declined at an inflation-adjusted rate of 0.4 percent from 2010 to 2015, widening the gap between income and rent by 1 percent.

Edmiston says, however, macroeconomic outlooks at the national level don’t take into account changes in rent affordability within local markets, which can vary greatly, and the western United States is a good example.

Western rents rising

Rent inflation in the West census region was 5.2 percent in November 2016, up 3 percentage points from mid-2012, according to Kansas City Fed Senior Economist Jordan Rappaport and Associate Economist Michael Redmond in their recent research “Consumer Price Inflation and Rising Rents in the West.”

And the extremely high rent increase is occurring disproportionately in four western metropolitan areas: Portland, Seattle, San Francisco-San Jose and Denver.

Rents increased by at least 5.7 percent from 2015 to 2016 in those cities, which also had the highest cumulative rent inflation over the previous four years.

Rappaport and Redmond say several economic factors are driving the high rent inflation. For instance, there has been an increase in highly paid workers moving to those cities, pushing up average household incomes and the demand for housing.

Although the United States is experiencing a shortage in new home construction, it’s even more severe in these four cities. Rappaport and Redmond say, “geography for the western United States—ocean and mountains—has significantly constrained new home construction in each of the four metros.”

And Denver, Seattle and San Francisco-San Jose have some of the tightest land-use restrictions in the country. Meanwhile, Portland has a geographical urban growth boundary that limits new construction, making it difficult to build new homes and driving up prices.

Although the economists expect rents in the four metro areas to continue to increase for some time, over the long term, however­—after evaluating overall economic conditions—they say, “the rising relative cost of living in these metros is likely to dampen housing demand and curb rent inflation.”

Mile-high inflation

Denver is one of the fastest growing cities in the nation and has become one of the most expensive cities to buy or rent a home in the Tenth Federal Reserve District, which comprises Colorado, Kansas, western Missouri, Nebraska, northern New Mexico, Oklahoma and Wyoming.

Bill James, an authority on Denver real estate services, recently published an analysis of apartment markets and trends. His company found that at the end of 2016, more than 23,700 housing units were under construction in metro Denver, of which almost half were in the city and county of Denver.

“Many of the new properties are leasing units at the upper end of the rental rate spectrum, which raises concerns for overbuilding in 2017, especially in that segment of the market,” the report states.

The abundance of upper-end rental properties has overinflated the average rental rate increases for Denver. For example, the Apartment Association of Metro Denver reported that average rental rates have risen more than 53 percent between 2009 and 2016, and as of 2016, the association says the average rental rate for a two-bedroom, two-bath apartment in the Denver metro was $1,569
per month.

Although the numbers are correct when considering overall averages, James says these figures are not an apple -to-apples comparison of apartment units. The abundance of high-end rental properties gives an imbalanced perception of overall rental inflation and pricing in the metro. Yet, for all the housing construction in the Denver area, more affordable housing is needed throughout the state.

“Unfortunately, we are not keeping up with household growth in the state of Colorado,” said Alison George, director of the Colorado Division of Housing, at a recent event at the Kansas City Fed that explored rent affordability, preservation and inflation.

More than 100,000 people moved to Colorado in 2015, and the government estimates about 100,000 moved to the state
in 2016.

There are more than 153,000 households in the state that spend more than 50 percent of their annual income on housing, George said, and the need for rental housing that better meets personal incomes is growing.

Assessing affordable housing

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Renters and their advocates, who typically represent low- to moderate-income households, have expressed concerns about significant increases in affordable rents and associated declines in affordability. Most of the driving forces behind the increases involve what Edmiston describes as the “usual suspects” such as population and income growth; however, some areas can be affected by industry sector growth such as an energy boom in oil- and gas-rich areas. Universities and military bases also can affect rent affordability.

Edmiston says it’s not just low- and moderate-income households affected by rent inflation. In some metropolitan areas, middle-income households also face rapidly increasing rent affordability due to declining incomes.

Why is there a growing concern? The threshold for housing affordability being a cost-burden on a household is almost uniformly defined as 30 percent of gross household income. Edmiston says, for the nation, the 2016 housing wage is $20.30 per hour. That is, a full-time worker in a single-earner household would need an hourly wage of $20.30 or more to rent a two-bedroom unit at Fair Market Rent without being a cost-burden on the household. Fair Market Rent is a federal housing standard primarily used to determine rental payment amounts for public housing.

Edmiston determined that a worker earning the U.S. federal minimum wage of $7.25 hour as of December 2016, and ignoring statutory overtime pay requirements, would need to work 112 hours per week to afford a two-bedroom apartment priced at Fair Market Rent. Even at $15 per hour, which has been proposed by some advocates as the new minimum federal wage, a worker would need to work 54 hours per week.

So when you consider the Denver metro’s average rental prices, such as $1,500 a month for a two-bedroom apartment, low- to moderate-income households, and even middle-income households struggle to stay within the threshold of housing affordability.

The Kansas City Fed’s Community Affairs office has recently conducted programs on rental and purchase of affordable housing to help individuals and communities address recent housing trends.

One program, which Edmiston spoke at in December at the Kansas City Fed’s Denver office, focused on preserving affordable rental housing in the midst of rental inflation. Another event in March, which was in conjunction with the National Development Council, focused on the practices of affordable housing finance. More information about the program is online at www.KansasCityFed.org/community.

Although some areas are affected more than others, Edmiston says with the housing shortage in the United States, rent affordability will continue to be a concern in the long term. Addressing this issue requires not only identifying the areas with troubling affordability trends, but also what makes these areas different from others, he said. And there is no one solution to affordability issues; it will take a combination of financial and policy solutions to address the matter.

Further Resources

Read “Residential Rent Affordability across U.S. Metropolitan Areas by Kelly D. Edmiston 

Read “Consumer Price Inflation and Rising Rents in the West by Jordan Rappaport and Michael Redmond 

Watch “Preserving Affordable Rental Housing: A Look at Tools and Polices," a Kansas City Fed conference on housing. 

COMMENTS/QUESTIONS are welcome and should be sent to teneditors@kc.frb.org.