The cost of paying rent is on the rise—especially in big budget cities like New York and Los Angeles. Middle class budgets are straining in response to the rising cost. While rent is increasingly more expensive nationwide—and across all types of rental properties—rent price increases tend to impact low-income tenants harder than middle and upper class families.
New research from the Federal Reserve Bank of New York demonstrates just how difficult the cost of rent is for low-income families to manage. “From 1993 to 2013, the cost of the cheapest 20 percent of U.S. rental units has increased more than 10 percent a year. Meanwhile, the rents of apartments and houses in the priciest 20 percent were flat over time.”
Why does the cost of housing impact lower-income families more? One theory suggests that, “housing costs may rise more slowly at the top of the market because most new construction tends to target affluent renters, mitigating rent inflation on existing high-end apartments.” For households in the top fifth of income earnings, “most additions to the new rental and owner-occupied housing stock created between 1989 and 2013 came from new construction. Those households occupied 10.8 million new units, while 4.7 million units were “converted” (essentially, displaced by the new construction) to serve households earning incomes in the next quintile down. At the low end of this income distribution, there was less new construction and more apartments trickling down from the higher tiers.”
The general theory of new construction is that by meeting demand for new units by building at the high end, affluent renters will move into the nicer units, and vacate their old apartments for the next rung of renters to occupy. In essence, the wealthier renters can continue to move into the nicer, new apartments while the next tier of renters move in to replace them. The problem is that, “as one moves down the rent level distribution, increases in the supply of housing increasingly come from previously higher-rent units, which may still have rents above the average of the incumbent units, pushing up rents more in such segments.”
While building new apartments is good for developers, it does not help lower the cost of housing for locals. Currently, rental properties are growing as more millennials delay purchasing a house in favor of renting longer than their baby boomer parents’ generation. If you’re planning to purchase a house, contact an expert at Apex Financial Advisors to discuss you financial plan and develop a strategy that helps you achieve your goals, grow your wealth, and protect your investments.