Squeezing out the working class through higher rents: 11.3 million Americans spend more than half their income on rent in 2011, a jump of 28 percent from 2007

January 17, 2014 in News by The Manimal

Source: Doctor Housing Bubble

Welcome to landlord nation.  People need a place to live and a recent Harvard analysis found that more Americans are spending a larger portion of their income on housing.  More to the point, there are now 11.3 million Americans that spend half of their income on rent.  This is a significant jump of 28 percent from 2007.  Rents also went up throughout 2012 and the first half of 2013 so this figure has definitely increased.  Is this a good thing for households?  Probably not but that is simply the current trend.  This is also a reason why only 1 out of 3 households can actually afford a home in California and is a direct consequence of the massive flood of investors into the real estate market.  When properties go back into the market with artificially low supply, these owners have the ability to command higher prices.  The end result?  More money to landlords and less money in the pockets of renting households.  And with America becoming more of a renter nation, this is putting a strain on the budgets of many households.

The massive gentrification in high cost areas

Only a handful of markets have higher prices than those seen in Southern California.  San Francisco is one of those markets.  The cost of housing in the Bay Area is astronomical and the recent tech and social media resurgence has caused a boom in home prices.  The media has covered the home price angle extensively but really hasn’t looked into the large rise in rents.  A recent report has some stunning figures on apartment rental figures:

rent san francisco

The current median rent for an apartment in San Francisco is $3,414 per month.  Even to afford the typical rental you’ll need a good income or a few roommates.  So it should come as no surprise that evictions are also up during this timeframe:

“(NPR) A recent city report finds that Ellis Act evictions have increased 170 percent over the past three years. Low- and middle-income tenants are unlikely to find another affordable apartment in San Francisco, where the median monthly rent has risen to about $3,400.”

Keep in mind this is happening in one of the most progressive areas in the country.  Many metro areas are seeing a similar gentrification of neighborhoods as working and middle class families are priced out.  The aggressive buying of properties by Wall Street has created a new kind of housing market.  One where the homeownership rate has declined dramatically but where home prices continue to go up.  Rents across the country have moved up steadily:

rent of primary residence

Currently rents are going up around a 3 percent rate.  This is problematic when incomes are having a tough time climbing up in conjunction.  So what happens is that more money is consumed by rents and also, mortgage payments.  The rapid rise is largely based on the booming real estate market and also, the banner year for the stock market.  Will this continue into 2014?

I think many of these changes also highlight a dramatically large class of Americans who are simply hanging on by a financial string.  Many don’t follow the financial media or pay close attention to macro trends.  They live paycheck to paycheck and debt payment to debt payment.  Data from last year shows that the typical reader of this blog has a household income around $100,000.  Compare this to the median household income of $61,000 for the state.  I’m fairly certain this is a trend across all finance and real estate related websites.

In California, the number of people on food stamps has jumped steadily throughout this recovery:


Source:  SNAP

This is a 55 percent increase since 2009.  Then you have younger potential buyers unable to purchase because many are saddled with large amounts of student debt and living at home.  This is why the latest figures for home sales in Southern California highlight a very split market:

“Cash” buyers:                  27.7 percent

FHA insured loans:          19.6 percent (scraping everything to buy)

ARMs: 12.9 percent (stretching budgets to compete with Wall Street)

It really is an interesting market.  The median price in SoCal is up 22.3 percent and sales fell 9.2 percent year-over-year.  Sales volume is very low but so is the inventory.  Given current prices it is much more difficult for investors to find a good potential flip or to find a good property to rent out.  We’ve noticed some slowdown in the last few months but real estate is a big momentum trade.  The current winds are still very strong and most headlines are positive when it comes to housing.  The fact that rents are rising and more income is going to housing simply reflects a shift to a rentier class.  This was the big play the Fed made to assist their banking friends.  In that respect, the Fed managed to essentially re-inflate the economy and their balance sheet is up to $4 trillion.  The big question will be, is this sustainable or is this similar to the Irrational Exuberance brought on by the master of bubbles, Alan Greenspan?  Only time will tell but one thing is certain and that is many working and middle class Americans are being kicked out of high priced metro areas via high priced gentrification.