This is just a quick look-see. Thanks to Jay Parsons, an economist with RealPage, I found the RealPage 2022 Market-Rate Apartment Affordability Report. There are some interesting findings in there with the main takeaway being that market-rate (i.e., non-subsidized) rentals are doing just great:
But this first-of-its-kind study into one of the largest segments of the U.S. rental housing market reveals a much more significant driver keeping rental distress – and evictions – low: The vast majority of renters were able (and willing) to pay the rent. Market-rate apartment renter incomes have soared since the pandemic, keeping rent-to-income ratios much lower than widely assumed. Those ratios have inched up slightly due to the 40-year high in inflation, but not enough to meaningfully change the story on apartment affordability.
So for those people renting market-rate apartments, renting remains very affordable. The problems come when you go down in quality and start looking at poorer people renting shittier apartments.
Also, this report is for professionally-managed market rate rentals, likely meaning big apartment building complexes, not for mom-n-pop and small rentals. As the authors note:
It’s important to note this study should not be viewed as representative of all rental housing in America. It excludes the large “mom and pop” market of small multifamily and single-family rentals. It also excludes true affordable housing, where rent is subsidized or capped to area incomes.
Nonetheless, as I started looking at the report, I tried to figure out what was going on. I think I have an idea — an untested hypothesis.
Two Key Things
First, the report showed that the renter profiles did not change much from 2019 to 2022, implying that the flood of market-rate renters had little to do with buying a home becoming more difficult:
Among market-rate renters, one common theory on rising incomes has been that would-be homebuyers priced out of the for-sale market are landing in apartments, inflating the income numbers. There is no available dataset to test that theory directly, so instead, RealPage looked at the median age of apartment renters signing a lease. If that theory were true, it could be assumed that median renter ages were increasing – as renters stayed in apartments longer with the benefit of larger incomes as they advanced in their careers. But that theory did not hold up. The median adult age of apartment renters actually dropped from 31.4 in 2019 to 31.0 in 2021 before returning back to 31.4 in 2022. Median age also held consistently between 31 to 32 in the years before the pandemic.
Also, there were no real changes in number of roommates, which would also imply economic hardship.
Second, on a percentage of income basis, the luxury apartments are more affordable than lower tier apartments:
And for those reasons, rents in Class C have grown slower than Class A or B – and that’s especially true upon renewal. Renewal rent increases in Class C have consistently registered below the headline Consumer Price Index (CPI), meaning a Class C renter’s housing costs are growing at a slower rate than their other expenses. As of June 2022, Class C renewal rent increases averaged 8.1%. That compares 9.1% headline inflation and renewal increases of around 11.5% in Class A and Class B apartments.
There’s a nice chart in the report showing that Class C rent growth is actually below CPI inflation.
Keep those two points in mind.
Renting vs. Buying in Ten Cities
What I looked at was the list of ten cities — five with the lowest rent-to-income ratio (most affordable) and the five with the highest rent-to-income ratios (least affordable). Keep in mind that we’re talking about market-rate rents only here in large professionally managed buildings. I took the data from RealPages then added some additional info.
Here’s my spreadsheet (link to which is here):
The Area Median Household Income is from the Census Bureau, using 2020 numbers. The Median Sold Price is from Realtor.com. And the FHA Loan Monthly Payment was calculated using Calculator.net.
A couple of things jump out immediately.
First, in six cities, the renter median income is higher than the area median income. In four, they are below area median income. I think that has a lot to do with who lives in those cities.
Louisville, Greenville, and Oklahoma City are not what you’d call top yuppie destinations. I’ve lived in Greenville, SC, and as much as I love that little city, it’s not where young tech entrepreneurs head after college. All three are much more… ah… blue collar markets, if you will. Virginia Beach is obviously a major military base, which I think would explain the huge gap between area median income and renter median income: the renters are in the Navy and don’t expect to settle down there.
The other six, on the other hand, are destinations for young professionals and possibly young families. It sort of makes sense why 31 year olds making above area median income might prefer to rent in luxury Class A properties instead of buying.
Second, look at the PTI ratios in these markets. All except Pittsburgh are quite unaffordable. Even Louisville, KY is 4.4 Price-to-Renter-Income (which surprised me). San Diego and Oakland are close to 10 to 1 price to income ratios.
So looking at these median market-rate rents versus buying a median priced home in that market using first-time FHA loans with a low 3.5% down payment… it is plain to see that buying a house will be quite a stretch. In San Diego, buying a median-priced home will be an extra $3,200 per month for the 31 year old renting a Class A luxury apartment. Even in Greenville SC, where the renters make less than the area median, buying a median priced home will cost you an additional $900 per month — almost double what you’re paying in rent for a nice market-rate apartment.
Quality of Life?
But thinking about it a bit more, I got to wondering what the quality of life difference would be for our 31.4 year old median renter if she chose to buy a median-priced home instead.
What I mean is… if our 31.4 year old is a young, upwardly mobile professional making more than the median income in the area (like say in Pittsburgh or Knoxville), then she has certain lifestyle expectations. She’s not going to McDonald’s for dinner all that often. She’s probably enjoying the finer things in life, rather than settling for the most cost-effective things in life. Which means that the median priced house in an area is probably not what she (and her partner, if there is one) is looking for from a home.
The upwardly mobile aspirations are rarely found in the median priced home; they’re found in the upper echelon home. Just like the apartment she’s renting is the luxury Class A building with luxury Class A amenities, the home she wants to buy is not the $265K median priced home, but the $500K home in a much nicer neighborhood.
That definitely puts the home purchase out of whack financially compared to renting.
Some of the marketing from the industry focuses on things like, “Don’t pay your landlord’s mortgage; build equity in your own home.” That’s smart financial advice, for sure, but it does tend to ignore the lifestyle sacrifices our 31.4 year old high-income renter would need to make in exchange. Going from a luxury Class A apartment to a median-priced home might not be what dreams are made of… and if that move requires more than double in housing costs… I don’t know that it makes much sense either.
So let me wrap up with my hypothesis, which I think is clear, but I’ll try to articulate it.
I think what we are seeing with market-rate renters is the combination of lifestyle preferences and unaffordable purchase options. The market-rate renters are paying their rent on time and in full, especially in the luxury Class A apartments, but it isn’t simply because they somehow love the World Economic Forum idea of not owning anything and being happy. It’s also because the homes they do want to buy are not the homes they can afford to buy, even on their higher incomes. San Diego and Oakland provide perfect examples, but we can see that even in places like Greenville, SC. Almost doubling your rent to get a less-than-aspirational median-priced home is not something most high-earning young professionals want to do.
With neither rent nor purchase price showing any signs of reversing (not just slowing the rate of growth, but actually going backwards), those young 30somethings will end up as 40somethings and still renting. Until we can get homes within reason of affordability — and there is no world where home prices at 550% of income is affordable — we’re going to continue to see the trend of more and more high-income renters instead of high-income buyers.
That should be something every brokerage, agent team, REALTOR Association, and mortgage company should be thinking about today.