Money Talks, So Should You

Declining income, continuing high rent is a dangerous combination

Brian O'Connell
by Brian O'Connell, MainStreet contributor

There was a brief period back in 2009-'10 when renting was “cool,” back in vogue after millions of U.S. homeowners saw the value of their houses plummet and many suffered foreclosures or saw the value of their homes go underwater.

So much for the American Dream of homeownership, the conventional wisdom had it. Only saps would pour good money into a underappreciating asset, and it was better to “scale down” and simplify one’s life without the financial and emotional burden of homeownership.

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That was then, and this is now.

We reported that U.S home prices are back on the upswing, rising 7.5 percent in 2013, according to the National Association of Realtors.

Perhaps not by coincidence, renters are seeing more of their income eaten by rental housing costs.

According to the Washington, D.C.-based Center for Housing Policy’s Housing Landscape report, released Friday, an alarming number of U.S. renters spend half of their household income on rental costs: "For the third year in a row, the incidence of severe housing cost burden among working renters has risen relative to the prior year. More than one in four working renter households (26.4 percent) spent more than half of their income on housing costs in 2011 — an increase of more than three percentage points since 2008."

Of course, that means 75 percent of U.S. renters didn’t spend half their income on housing over the same period. Are they in trouble too?

Maybe, says the center, as the underlying problems linked to household income and rental costs (such as underemployment and thinner paychecks) really haven’t gone away.

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“The growing rate of severe housing cost burdens among renters is not a new trend, but it is clearly an unsustainable one,” says Janet Viveiros, a lead researcher for the study. “While rental costs have steadily risen over the last few years, wages for these working families have not fully recovered from the hit they took between 2008 and 2009. Spending most of your paycheck on rent means cutting back on other necessities, including health care and even food.”

According to the CHC, U.S. consumers have seen their household income decline by 3 percent from 2008 to 2011, even as rental costs rose by 6 percent.

That is what Viveiros means by “unsustainable.” She notes in the study that “renters are so thin by growing household costs, many face impossible choices.”

One-time homeowners helped fuel the rise in rental costs. Study co-author Maya Brennan says that so many Americans sold their homes and downsized into rentals that it increased demand for rental properties, pushing prices upward.

“While the economy pushed both owners’ and renters’ incomes down, the shift away from homeownership is pushing rents up due to increased demand,” she says. “What we’re seeing with the rental market is not explainable by population trends alone — it clearly reflects the movement of former homeowners into rentals as well as delays in home purchases by current renters.”

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“But this increase in rental demand has not been matched by an increase in supply,” she adds. “This imbalance leads to rising rents in markets across the country.”

Homeowners also saw their incomes decline over the three-year span, but now they’re seeing the value of their homes rising again, making them more valuable relative to rental units.

That’s not the case with renters, especially in states such as California, Florida, New Jersey, Hawaii and New York, which rank highest on the list of states with renters facing a “severe housing burden.”

For them, and million of other Americans, renting a home is just getting harder and harder every year.

To gauge whether you should rent or buy, check out this calculator.

 

Brian O’Connell has 15 years of experience covering business news and trends, particularly in the financial, health care and career management sectors. He has written 14 books and appeared on CNN, Fox News, CNBC, C-Span, Bloomberg, CBS Radio and other media outlets and in such publications as The Wall Street Journal and The Street.com. He is a former Wall Street bond trader.