A record number of American renters are spending at least one-third of their income on rents, according to The State of the Nation's Housing 2023, published by Harvard's Joint Center for Housing Studies.
A total of 21.6 million households now spend more than 30% of pre-tax income on rent. Some households are even paying even up to 50% of earnings on apartments, per Harvard’s research. Housing experts often suggest tenants spend less than 30% of their income on rent.
"Housing costs remain well above pre-pandemic levels thanks to the substantial increases over the last few years," Daniel McCue, senior research associate at the Joint Center, said in the 2023 report.
Why? In large part due to the growth of so-called "luxury" buildings that have replaced less expensive options. In the last two decades, the share of construction for high-priced apartments — known as Class A — grew faster than more affordable ones. In fact, over half (51%) of 2022 rental construction projects were luxury apartments, according to Moody’s Analytics data. Also, only 34% of the market consisted of high-cost rental units back in 2000; that number was 51% in Q1 2023, per Moody's.
"The challenge is that the new supply... tends to be at the very top of the price spectrum," said Carl Whitaker, director of research and analysis at RealPage.
"If rent grows faster than your income every year, and your health care expenses grow faster than your income every year...that squeeze just makes it very difficult in normal life," Katherine McKay, associate director at the Aspen Institute Financial Security Program, told Yahoo Finance.
Lack of choices
Historically low rental vacancies in recent years also reflect the lack of affordable options for households. Although the vacancy rate climbed to 6.4% at the beginning of 2023 — a welcome increase from the four-decade low of 5.2% in late 2021 — it is still far from a healthy rate of around 7% to 8%.
"What is often looked for is a level of vacancy that supports a renter’s ability to move and to have at least some pricing power," Lu Chen, Moody’s Analytics senior economist, wrote in an email. "In theory, this would allow rent increases to remain marginally above the general rate of price increases in the economy."
But "we expect the national average vacancy to linger around 5% until 2025," Chen said. That number could be more bleak for lower-income households — the rate for lower-cost housing remains at a depressed level of 4.7%.
"What [also] has happened in many places is that renters who might buy homes can't buy homes, so they stay in their class A buildings, and then renters who want to live in Class A buildings can't find spots, so they move a tier down," McKay said. "It trickles down every income group having a greater competition for fewer new units that meet their needs."
Apartments equipped with the latest and best amenities like heated pools and gyms are known as Class A buildings. Class A buildings then retire to become class B in 10-15 years, which then devolve into class C in another 5-10 years. Rents drop as buildings downgrade from A to B to C. But in the last decade, not enough buildings were built, which means not enough apartments progressed to the lower tiers.
The fancy boom
As Class A buildings saturate the rental market, the share for older and less expensive apartments, categorized as Class B and C, has shrunk dramatically. In the last two decades, those types of units fell to 49% in Q1 2023 from 66% in 2001, according to Moody's.
But that might not change anytime soon because, many times, fancy apartments are the only profitable option for developers. The majority of construction costs go into purchasing land, building materials, and building permits. Adding nice finishes doesn't drive costs at a high level but could demand more rent revenue.
"The thorny part is that for the middle-income renters," McKay said. "The best option for them is class B where it is not super expensive but also not where then the quality might be a problem, the sweet spot. But there just isn't enough, because we didn't build enough for such a long time."
The future? Not too cheery.
"Number of households continued to grow at around 1% annually," Moody's Chen said. "The rapid household formation requires inventory growth to keep up the pace. Further, while the population is aging, there is a large swath of Gen Z (the oldest are 24) and 25- to 40-year-old millennials that are ready to enter the rental market."
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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