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.
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.
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 due to owners wanting to make additional income. 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:
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
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
