With Ever-Increasing Rents, Is Renting the Right Move?

Supply and demand is a basic tenet of capitalism. It drives the engine of America and it certainly drives the American housing market.   But are millennials that escue the commitment of owning a home making a gigantic mistake?  What about the Boomers?

Burned by the last housing bubble, many are also choosing to avoid returning to the homeownership game.   It certainly appears that way.

I feel for millennials. In general they exited college burdened with huge student loan debt. Much larger than the burden that previous generations faced.

The general consentment amongst that generation is that one needs to be mobile to secure the best jobs. The best jobs are often located in the hottest, and least affordable,  real estate markets.  San Francisco, Silicon Valley, Los Angeles, New York, Miami and San Diego are all hotbeds of job growth and rental prices clearly reflect that.  

Commitment issues aside, it appears that the growing number of people neglecting home-ownership in favor of renting will cause a significant drain on the American economy and on their pocketbooks.  

It’s not just the less wealthy urbanites who are feeling the rent pressure, the middle class is feeling the pinch as well.   It’s also not just the Millennial crowd: This problem is also  evident across different age groups, including Gen X and Boomers who never left the rental market, or find themselves back in it after the housing crash.

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What Income Should You Allocate to Housing?

Basic, decades old wisdom, declares that you should avoid putting more than 30% of your income toward housing.   It’s become virtually impossible in many metro areas to make that happen. California being the primary offender, but definitely not alone in the “not affordable” category.

The number of U.S. households that spend at least half their income on rent—the “severely cost-burdened,” in the lingo of housing experts— is expected to jump 25 percent to 14.8 million over the next decade.   Exacerbating the problem is the fact that more than 1 million Latino households and over 1 million retirees will like fall  into those ranks.

Even in the best case, with wages growing a full percentage point per year faster than rents, the number of severely-cost burdened households will barely fall, from 11.8 million in 2015 to 11.6 million in 2025.   In the baseline scenario, where rents and wages (and inflation) increase at 2 percent each year, the researchers expect the number to reach 13.1 million.

A big part of the problem is that fewer households are making the transition from renting to owning, which means more competition for limited inventory.   Housing accounts for the single largest expenditure for the bottom 90 percent of earners— which is pretty much everyone. That’s why this is a big deal for the US economy.

While you may be able to scrape and skimp in order to decrease other bills like groceries, utilities, or extras like entertainment, housings costs are generally fixed—at least for a period of time.   To put it bluntly, higher rents kill consumer spending. That is not good for the American economy.

Clearly, US housing policies need to change. More affordable housing needs to be created and more units, both homes for sale and multi-family units, need to be built. Not too fast though, there’s still a lesson that we should have learned during the last crash and recession experienced from 2007 to 2012.

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