A new analysis finds that what we see today is basically “the current manifestation of a long-run trend.”
It’s getting harder and harder for recent college graduates to afford a place to live in the booming U.S. cities where the most diverse pool of jobs can be found. In the tech hub of San Francisco, new grads need to make more than $137,000 a year to comfortably afford that city’s median rent, but their median salary is just $41,000, according to a new analysis by Trulia. In New York, a new grad would need a starting salary of $121,500 to pay the median rent, almost four times the $33,000 median income for recent grads there.
While surging rents in superstar cities like these two grabs our attention, the reality is that the current urban housing affordability crisis dates back quite a ways, as Wharton real estate economist Todd Sinai argues in a new policy brief. Yes, rents have been rising rapidly in some cities over the last few years. And yes, incomes have failed to keep pace with rising rents. But Sinai’s analysis shows what we see today is basically “the current manifestation of a long-run trend.”
The graphs below chart the pattern, showing the annual growth of rent, adjusted for inflation, in America’s largest cities between 1990 and 2013. Sinai created the charts using data from the real-estate information firm REIS, which in turn comes from surveys of landlords of apartments with the highest rent and highest quality in 49 major U.S. metro areas. Each vertical red bar corresponds to a metro area.
The first part of the graph (“Panel A”) shows that the roots of the current affordability crisis date back to at least the 1990s. During that era, six cities saw rents dramatically outpace inflation, growing around 3.5 to 4.5 percent per year. As Sinai points out, “That is a lot of rent growth—over a 10-year period, 4 percent growth corresponds to a nearly 50 percent increase in real rents.”
But since then, rents have actually grown much more modestly, especially in recent years. There was a slowdown in the early 2000s in many cities, and a more moderate surge in others (“Panel B”). Between 2008 and 2013, even more cities saw slow rent growth (“Panel C”). As Sinai writes, “rent growth in most cities did not keep up with inflation [in that period]. In only about a dozen cities did rent growth outpace inflation—and even then, just barely.”
So why such growing concern over housing affordability today? For one, Sinai points out, rents have outpaced inflation in most big cities over the past couple of years. The chart below shows the trend between 2012 and 2013.
Additionally, incomes have failed to keep pace with rents for the better part of a decade, largely because real median incomes have declined. This effect has been particularly acute in superstar cities like New York, where incomes fell by 8 percent between 2000 and 2011, while rents increased by 7 percent. And while housing affordability has long been an issue for the poor, concern has crept up the income ladder in the last couple of years. This comes through in the charts below.
Sinai graphs the trend in rental affordability—based on the share of households spending 30 percent or more of their income on rent—in 10 cities nationwide. Below are his graphs for three cities: the superstar cities of New York and San Francisco, with their much-documented housing-affordability crises, and the more sprawling and ostensibly more affordable Sunbelt city of Atlanta. The colors signify households at different income brackets (adjusted to 2010 dollars): Red is for households making $20,000 annually and below; blue for those making between $20,000 and $35,000; dark grey for those making $35,000 to $50,000; light grey for $50,000 and $75,000; and black for households making more than $75,000 per year.
Here’s the chart for New York:
Next, here’s San Francisco:
And, finally, Atlanta:
In all three cities, the lowest income households (indicated by the red and blue lines) have long faced considerable housing affordability problems. But over the past couple of decades, affordability has become a bigger and bigger issue for middle-income households. Look at the steep upswings in the blue, dark grey, and light grey lines for New York and San Francisco, and for the blue and dark grey lines for Atlanta. In all three cities, the black line—for the highest income households—shows a far more modest climb throughout the decades.
And affordability isn’t just a problem for renters; it’s a growing problem for homeowners as well. “Many cities are exhibiting decreasing housing affordability, period,” writes Sinai. “It doesn’t matter whether the houses are owned or rented; in those cities, households of all stripes pay increasing shares of their incomes for housing.” As the graph below shows, the growth in rents closely tracks the growth in home prices for the better part of the past half century.
The 45 degree line, in blue, shows where rent and house price growth are equal. The red line, by contrast, is the fitted line between rent and house price growth. Clearly, the latter is a bit above the former—house prices have grown about one-third of a percentage point faster than rents. But that’s very close. “Indeed,” Sinai writes, “growth in rents has closely tracked growth in house prices for a very long time.”
The United States thus faces a problem that runs far deeper than just rent affordability in a few major cities. “It is true that, in many cities, rental costs are higher now than they were 10 years ago,” Sinai notes. “But 10 years ago, rental costs were higher than they were 10 years before that. Likewise, ownership costs have followed the same pattern.” The problem is long-term and pervasive. “It is hard to conclude that there is an affordability cliff from whence we can step back from the brink. Rather, the threat to housing affordability in this country is much more fundamental, and more economically pervasive,” the economist writes.
Sinai argues that for those who can afford it, buying a home may offer a way to sidestep this cycle of ever-rising housing prices and rents. “Because homeowners lock in their house price at the time of purchase,” he writes, ”when rents rise, a homeowner’s annual housing cost is unchanged.” But as the last housing crisis showed us, our current system encourages a deadly combination of irrational expectations, outright speculation, and unscrupulous lending practices that can do serious damage to the broader economy. Buyers, beware.
Ultimately, Sinai frames America’s worsening housing affordability crisis in unusually blunt and candid terms. “Already it is no longer the case that someone can automatically afford to live in the city in which she grew up,” he writes. “A debate needs to take place about the value our society should place on whether a household should have an unlimited right to choose where to live, and how much they should be insulated—if, at all—from the differences in cost.” The brutal reality may well be that more and more people will be unable to live in superstar cities, as they are sorted and shunted off into less desirable and less costly locations.
Such candor is welcome, if disheartening. The reality is that the people living in increasingly expensive communities cannot magically adjust their lives to the vagaries of the market. Our neighborhoods give real meaning to our lives, and Americans often live where they do because of proximity to family or friends. Moving, then, may help a family save money on housing—but it incurs real social costs that affect their relationships and lives.
This kind of market-based sorting process ultimately reinforces the advantages of the already well-off. As numerous studies have shown, the ability to locate in advantaged urban neighborhoods provides access to better schools, lower crime, better libraries, and more accomplished role models and peers. The end result compounds economic inequality with a broader inequality of well-being, which reinforces and perpetuates America’s growing social and economic divides.