Brian Snyder/Reuters

America’s renters are paying more and having less money left over to generate the demand required for economic growth.

“The rent is too damn high” is more than a political slogan. It reflects the harsh reality of increasingly unaffordable housing in America today. Ever since the economic crisis of 2008, American has been in the midst of a “great housing reset”—a shift from home-ownership to renting. But it’s not just that home-ownership that’s become increasingly unaffordable. Renting has too. Between 2001 and 2014, the number of renters who spend more than half of their income on rent grew by more than 50 percent, from 7.5 million to 11.4 million renters.

A new study by Denise DiPasquale and Michael Murray published in the Journal of Regional Science provides some answers for this growing rent squeeze. The study uses data from the U.S. Census and especially the Consumer Expenditure Survey to chart the share of income devoted to rent and other expenses over the past 80 or so years.

The study identifies a key paradox that lies behind America’s growing rental housing affordability crisis. For the four decades between 1930 and 1970, the long era of rising home ownership, the incomes of renters rose while the cost of renting declined. But after 1970 something puzzling and troubling happened: rents have increased while the incomes of renters have fallen. This has meant that renters have had to scrimp on other purchases, from necessities such as food, clothing, and schooling to amenities such as eating out and buying new tech gadgets. The rising share of income devoted to rent may be an important contributor to what economists dub secular stagnation, the inability of our economy to generate the robust demand required to sustain economic growth.

The Great Rental Reversal

The period from 1940 to about 1960 was a golden era for renters. Over this three-decade period, as the study notes, renters’ incomes increased as the cost of rent fell. Part of this was due to rising incomes generally and part was due to increasing home-ownership and the shift of population to the suburbs, which helped to keep the price of rental housing in cities low. The combination of higher incomes and lower rents allowed renters to afford more for their dollar.

But all that changed beginning around 1970. Since that time, rents have risen as renters’ incomes have declined. From 1970 to 2010, rents increased at more than twice the rate of income growth—28.7 percent versus 13.8 percent. This trend occurred in metro after metro across the country as the table below, from the study, shows.

In New York, rents rose by 50.2 percent, at the same time that real incomes of renters fell by 14.9 percent. In Los Angeles, rents increased by 53.3 percent, as the real incomes of renters declined by 7.4 percent. In San Francisco, rents increased by 58.7 percent, while the real income of renters declined by 10.7 percent.

This was not only the case in superstar cities and tech hubs, but can be seen in metros across the country. In sprawling Houston, rents increased by 24.3 percent as the real incomes of renters fell by 12.4 percent. In Pittsburgh, rents increased by a more modest 4.3 percent but the real incomes of renters plummeted by a whopping 31.5 percent.

Percent Change in Income, Rent, and Spending

Real Income Relative Rental Price Real Housing Consumption Real Non-Housing Consumption
New York -14.9 40.2 21.8 -22.9
Los Angeles -7.4 53.3 19.7 -13.6
Atlanta -15.2 6.9 39.6 -25.6
Cleveland -42.4 -2.0 27.3 -47.6
Pittsburgh -31.5 4.3 17.8 -36.5

The end result of this “great rental squeeze” was squeezed household budgets. As renters were forced to spend more money for rent, there was less left over for consumption that could help drive growth. What the Noble-prize winning economist Edmund Phelps has called “America’s house passion” is not just about spending too much on single-family homes, but spending to much on rent as well. Between 1970 and 2010, as rents increased by 28.7 percent and real housing consumption grew by 21.4 percent, real non-housing consumption fell by 21.8 percent.

This trend can be seen in every metro tracked by the study. Real non-housing consumption declined by 22.9 percent in New York, 13.6 percent in LA, 12.2 percent in San Francisco. But the decline in non-housing consumption was even greater in Rustbelt and Sunbelt metros. It declined by 49 percent in Detroit, 47.6 percent in Cleveland, 36.5 percent in Pittsburgh, 33.1 percent in Chicago; and by 32.4 percent in Miami, 25.6 percent in Atlanta, and 20.4 percent in Dallas.

The end result is less money left over for consumption and less of the real demand required to stimulate and grow the economy.

The Incredible Growing Rental Apartment

But what lies behind this shift? The study considers several possible answers.

One is the rising rents that are the consequence of gentrification and the back-to-the-city movement. But the study finds that not to be the case.

Another is land-use restrictions that have driven up costs by restricting the supply of rental housing. But here again, the study finds no evidence that this is the case.

The actual answer, according to the study, is much more basic. Renters are simply spending more money to consume more housing. As the chart below shows, the average size of rental units increased by about 4 percent, from 1,245 to 1,301 square feet, between 1985 and 2011, while the average square footage per person grew by more than 9 percent, from 458 to 500 feet, over the same period.

Consumption of amenities such as more bathrooms, washer/dryers, dishwashers, and central air conditioning grew even more. The number of units with two or more baths more than doubled between 1985 and 2011. The percent of units with dryers grew from 30 percent to 53.2 percent; the share with dishwashers increased from 28 percent to 49.7 percent and the share with central air increased from 25.9 percent to 53.1 percent. You can think of this as a “Keeping Up with the Joneses” kind of effect, where renters have spent more money to consume bigger, more modern units.

Renters’ Space and Amenities, 1985 and 2011

1985 2011
Median square feet per unit 1,245 1,301
Median square feet per person 458 500
Percent with 2+ baths 11.7 27.1
Percent with clothes washer 40.5 56.5
Percent with clothes dryer 30.0 53.2
Percent with dishwasher 28.0 49.7
Percent with central air 25.9 53.1

Any way you slice it, the end result is the same: renters are devoting more and more money to housing and have less and less left over to spend on other things. This is not only bad for renters’ financial position, it is bad for the economy writ large, creating less of the demand needed to sustain economic growth. It may very well be that Americans’ passion for consuming housing—not just single-family housing but rental housing as well—is a key contributor to the nation’s ongoing economic malaise.

There was a time when the American Dream of a suburban home helped to stimulate the industrial economy, creating demand for everything from cars to appliances rolling off the nation’s assembly lines. But today, most of those products are made overseas; and the United States has become a knowledge economy where density, not sprawl, is required. Housing is now in many ways a fetter on economic growth.

A key factor in restoring the economy may lie in convincing Americans that the key to a good life and to restoring the American Dream lies in consuming less housing.

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