Franklin Schneider | Wealth of Geeks
A recent study conducted by Real Estate Witch reveals that rent prices have seen a significant increase over the past 40 years. In fact, rent growth has outpaced both inflation and income growth by 40% and 7% respectively since 1985.
While rent prices have steadily risen, wage growth has been more unstable. According to the study, income has increased by approximately 4% annually since 2011. However, when adjusted for inflation, it has only grown by 2% each year. This disparity between rent and income growth has eroded the purchasing power of the average U.S. worker.
The persistent high rent prices can be attributed to the increasing demand for individual housing. The COVID-19 pandemic has accelerated the trend towards solitary living, but the construction of new homes and apartments has not fully recovered from the 2008 financial crisis, resulting in limited inventory.
Ezra Glenn, a lecturer at MIT’s Department of Urban Studies and Planning, explains, “When you combine a limited resource like housing with pervasive and increasing income inequality, the rich have the power to set the prices. As a result, the poor end up paying a larger portion of their income or being pushed out completely due to the competition in these limited markets.”
The study also highlights that the rent-to-income ratio has become less favorable for renters in the United States. Between 2009 and 2021, this ratio increased in 46 out of the 50 most-populous metro areas.
A 42% Increase
During the same period, the median rent across the U.S. surged by 42% – from $817 per month to $1,163. In highly sought-after rental markets, the rent increase was even higher.
Rent increased by more than 42% in half of the 50 most-populous metro areas, and in seven cities, it surged by over 60%.
For example, in San Jose, rent spiked from $1,360 per month to $2,511 – an 85% increase in just 12 years, equivalent to an average annual growth of around 7%.
While San Jose’s rent increase is already extreme, there are six cities on track to surpass it, with rent rising by 9% or more from 2022 to 2023.
Affordability Challenge
The current affordable housing crisis in the U.S. is a result of rent growth outpacing income growth in 46 of the 50 most-populous metro areas.
One of the most striking examples is Denver, where rent exceeded income by a staggering 71% – the highest percentage among all 50 cities analyzed. Denver is not the only city experiencing a widening gap between rent and income. In seven cities, rent surpassed income by over 50%.
Between 2009 and 2021, income growth outpaced rent growth in only four U.S. cities: Providence, Rhode Island; Buffalo, New York; Cleveland; and Pittsburgh.
These cities have maintained their affordability partly because they have experienced lower population growth compared to cities with sharp rent increases. During the same period, the population did not grow by more than 1,500% in any of these four cities. In contrast, the population grew by at least 1,500% in all seven cities where rent exceeded income by over 50% between 2009 and 2021.
However, if renters were to flock to affordable cities due to lower prices, increased demand would likely drive up rent.
Most and Least Affordable
Financial experts suggest that individuals should spend no more than 30% of their gross monthly income on housing. On average, Americans currently spend about 20% of their monthly wages on rent.
Among U.S. cities, Miami has the highest rent-to-income ratio, with renters spending 28.5% of their monthly income on rent. Miami residents face the combined challenge of high rent and low pay. Their monthly rent of $1,492 is 28% higher than the national median, while their annual income of $62,870 is 9% lower than the U.S. median.
On the other hand, Cincinnati renters have a more favorable situation, spending only 15.5% of their monthly income on rent. Furthermore, Cincinnati renters earn $70,308 – 2% higher than the national median income – and pay just $906 a month for rent, which is 22% lower than the national median.
After Cincinnati, the most affordable cities for renters, based on rent-to-income ratios below 17%, are Pittsburgh, St. Louis, Minneapolis, and Buffalo, New York.
This article was originally published by Real Estate Witch and syndicated by Wealth of Geeks.
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