The gap between rental costs and household income is widening to unsustainable levels across the country. As more renters face steeper costs, it may put them even further away from home ownership, according to a new study released by the National Association of Realtors (NAR). In the study, the NAR evaluated income growth, housing costs, and changes in share of renter and owner-occupied households over the past five years in metropolitan statistical areas across the U.S.
Over the last five years, a typical rent rose 15 percent, while the income of renters grew by only 11 percent, according to their research.
"The gap has worsened in many areas as rents continue to climb and the accelerated pace of hiring has yet to give workers a meaningful bump in pay," says Lawrence Yun, NAR's chief economist.
New York, Seattle, and San Jose, Calif., are among the cities where combined rent growth far exceeds wages, according to the survey.
"Current renters seeking relief and looking to buy are facing the same dilemma: Home prices are rising much faster than their incomes," says Yun. "With rents taking up a larger chunk of household incomes, it's difficult for first-time buyers – especially in high-cost areas – to save for an adequate down payment."
Meanwhile, those who were able to buy a home in recent years have been insulated from the rising housing costs since they were able to lock-in a low 30-year fixed-rate mortgage with a set monthly payment, according to NAR's study. As such, home owners were able to grow their net worth as home values increased and their mortgage balances went down.
"The result has been an unequal distribution of wealth as renters continue to feel the pinch of increasing housing costs every year," according to NAR’s study.
The markets that have seen rents rise by the highest amounts since 2009 are:
"Many of the metro areas that have experienced the highest rent increases are popular to millennials because of their employment opportunities," says Yun.
The key to relieve housing costs: Builders need to ramp up the supply of new-home construction, according to Yun. He estimates that housing starts need to rise to 1.5 million. Over the past seven years, housing starts have fallen far short from that historical average – averaging about 766,000 per year.
"With a stronger economy and labor market, it's critical to increase housing starts for entry-level buyers or else many will face affordability issues if their incomes aren’t compensating for the gains in home prices," Yun says.