Where Is the Rent Too Damn High?

April 29, 2014
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Several recent articles have noted a sharp rise in the price of renting an apartment or house across the United States. Many have also argued that the rise in rents disproportionately affects lower and middle class renters. We decided to take look by examining the great data available on rents from Zillow.

The chart below shows general inflation (measured with PCE headline inflation) versus the increase in rents. Both series are indexed to be 100 as of November 2010 (the first month the Zillow data are available). The pattern is undeniable: rents are rising much more rapidly than other consumer prices.

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So rents are rising rapidly. But where is the increase in rents the largest? Several stories suggest that the rise in rental prices has been largest for lower and middle income families. Zillow has zip code level data on rents, which we can use to evaluate this argument.

Here is the growth in rent from November 2010 to March 2014 across zip codes, where we split zip codes into five groups based on their average adjusted gross income as of 2006.

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As the graph clearly shows, the growth in rents has been largest for the richest zip codes, not the poorest. From 2010 to 2014, rents increased by almost 25% in zip codes with an average income of $100 to $200 thousand. Rents increased by just over 10% in zip codes with average income less than $35 thousand.

One worry is that the pattern in the chart above reflects differences across cities. For example, if Miami and New York City have higher incomes and rents are rising the most in those cities, we would mechanically find higher rent growth in higher income zip codes. This isn’t the case. Even if we focus only on the within-city variation in income (using city fixed effects), we find that rents are going up more in high income zip codes.

Of course, it could still be that the poor are suffering disproportionately from the increase in rents. Almost all data we have seen suggests that the poor have seen weaker income growth from 2010 to 2014. Even though rents have gone up more in rich zip codes, rents as a fraction of overall income may have gone up more for the poor. Unfortunately, zip code level data on income are not yet updated through 2014, so we will have to wait to see whether rents as a fraction of income have gone up most for the poor. But the above chart shows pretty clearly that the percent change in rents has been highest for the rich, not the poor.

So why might rent growth be less in the poorest zip codes? One potential channel is foreclosures. A large number of foreclosures could depress rents through too channels. First, foreclosures increase the supply of housing available for rent. Second, foreclosures could make a neighborhood less desirable, which again would push down rents in the neighborhood.

Low income areas saw many more foreclosures during the Great Recession — perhaps this can explain what is going on in the above chart? Here is a chart that lends support to this argument. As it shows, rent growth has been much lower in zip codes with the most foreclosures:

 

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We believe that the Great Recession has led to a long-run shift in favor of renting over owning. We need to focus on growth in rents as much as we focus on house prices. This is a quick attempt at understanding what has been going on, but we hope to see more research on this question going forward. In that spirit, here are a few additional links worth checking out:

The Rent is Too Damn High, by Krishna Rao at Zillow

America’s Rental Housing: Evolving Markets and Needs, by the Joint Center for Housing Studies of Harvard University

In Many Cities, Rent is Rising Out of Reach of Middle Class, by Shaila Dewan of the New York Times

 

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3 Responses to Where Is the Rent Too Damn High?

  1. Finn on April 29, 2014 at 9:30 ami

    In your first graph, the slopes appear to be roughly equal both before and after 2012, but there is a 6 month period in 2012 where rents skyrocket. What is up with that? If you do a (say 6 month) running average over the data, what does it look like?

    Also, I’ve seen several stories for the Los Angeles area claiming that the rental market is actually two relatively unrelated markets. One for rich people and one for the rest of us. If that is the case, then I would council caution when talking about averages. Perhaps you can show us a histogram of the average rent by zip code? And even a correlation plot between average income in a zip code before 2014?

  2. New Deal democrat on April 29, 2014 at 11:05 ami

    The US Census Bureau has been keeping statistics on the “median asking rent” since 1988. It is table 11 here: http://www.census.gov/housing/hvs/data/histtabs.html

    It shows a much more subdued increase in rents compared with Zillow over the same time period. You might want to explore the differences.

    Also, renters are overwhelmingly in the lower half of household incomes. Wage increases for lower income jobs have fared worse than the median. Thus renters are more income constrained on average than homeowners and landlords are similarly constrained in what rent increases they can pass on.

  3. Gus Halberg on May 2, 2014 at 4:09 pmi

    If I have been making $12 for the last 3 years, my income has been steadily decreasing in real terms. And many, many people have not had raises in the last 3 years.

    If the cost of rent has been increasing at 1%/year for the past 3 years, the cost of rent has been going up, in nominal as well as real terms, at the same time my nominal wage has been stagnant and my real wage has been going down.

    1% may not seem catastrophic, but when it’s cumulative at the same time that my nominal wages are stagnant, rent is going up. Maybe not at the same rate as in the rich zip codes, but it’s going up, and it’s hurting.

    When you’re on the margin, even ‘small’ things can cause major damage. Maybe it isn’t “too damn high”, but it’s higher.