Rental rates are outpacing wage growth: What are the implications of rising rents when wages are simply not keeping up?
There are bigger implications to the economy when rental rates are increasing at a rate faster than wage growth. This is important because we have added 7 million renting households in the last few years. For the moment, it simply looks like more money is going to be funneled into the housing market versus other segments of the economy. If your rent went up by $100, that is $100 that is not being spent on other sectors of the economy. Amazon already showed some hints that consumers are looking tapped out. Of course the holiday spending orgy is around the corner so we shall see. Falling gas prices help a bit but for consumers, housing is the biggest monthly line item expense. Landlords like home sellers are going to charge as much as they can. And with many homes now being owned by large investors, we are seeing steady rent increases in many markets. How far up can rents go? For rental rates, you are capped by what local area households can pay from actual income. It might be useful to examine the rate of increase between wages and rents.
Wages and rents
The trend of investors buying up single family homes is largely a new one. It will be interesting to see the impact of the massive amount of investor buying in single family homes unwind over the next decade. Rents may have increased at an even faster rate because some investors bought run down foreclosures and upgraded the property. These upgrades were then used as reason to hike rents up. This happened in the Inland Empire and also in places like Sacramento.
The trend of higher rents seems to be a nationwide event:
This is a rather telling and disturbing trend. You see starting in 2011, rents started diverging from wage increases. When this happens, all you have is more money being allocated to housing. Real estate rents don’t necessarily cause a boost in economic activity. All those large investors are likely funneling rents back up to fund holders or are simply looking for ways to create rental streams from the money they are collecting. You get more bang for your buck from people actually creating jobs and creating products and services in the economy versus people simply jacking up rents and taking more disposable income from families. Plus, these investors had the luxury of going in with artificially low rates and had front row access to foreclosures when the deals were great. Many great deals went to the all cash crowd via auctions or direct REO sales with banks.
The chart above shows a divergence from wages and rents. Rents are increasing at over 3 percent per year while average hourly earnings are increasing slightly below 2 percent. This gap has been going on now for three years. This is unsustainable of course but in the mean time, more money is flowing into the new feudal landlords.
This is crucial to examine because we have added a very large number of renting households. In L.A. and Orange counties we have a renting majority. This certainly is impacting many people. Folks in San Francisco are seeing a rental market on steroids. The paths are currently unsustainable so by definition, something is going to give. The growth in renting households has been astounding:
The growth is rather dramatic and will change perceptions on housing. In California we have 4.1 million people of food stamps (up from 2.6 million in 2009). These people are living somewhere. Then you have a larger number of people living paycheck to paycheck just having enough to pay the rent. We also have 2.3 million adults living at home because of financial reasons. Even for tiny stucco boxes of say $450,000 a household would need to save $90,000 for a 20 percent down payment. Overall most people are not able to do this and that is why we now hear rumblings from the FHFA about lowering the down payment requirement from 5 to 3.5 percent.
Having rents grow at a faster rate than wages is problematic. This split is causing a pull on GDP lower because it suppresses household formation, takes a direct hit to consumer spending, and also constricts labor mobility. This is simply unsustainable but for the mean time, more money is being diverted in the form of rents.
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79 Responses to “Rental rates are outpacing wage growth: What are the implications of rising rents when wages are simply not keeping up?”
HOUSING TO TANK HARD IN 2014!!
Nice! Well done! 🙂
In January this year I predicted on this blog that housing would go up 6% year over year. It’s at around 5% you increase now.
So, Tank Harders, what will be the yoy “Tank” decline percentage in December?
You’ve got 2 months to see your Tank materialize.
Landlords spend money in America. The renters give money to the American landlord instead of buying more consumer goods that are manufactured in Communist China. The renters are supporting America by giving the money to the American landlord instead of the Reds. Before the gasoline went down, we were giving that money to the Arabs(ISIS). Now we get to give that money to the American landlord. Remember, as the chart shows, rents were below wages for sometime, now they are above. All part of the cycle. There is nothing to get overly excited about.
Ira, what in the world makes you think the landlord is American? lol
For the most part the landlord is american. Very few exceptions from the rule, but there are some.
I lived in 7 apt bldgs over a 20 year period, most in SM and WLA. All but 1 were American landlords. Most were decent people.
Hobin Rood’s America !
Rob the poor and give it to the rich !
Some rent-controlled tenants are far wealthier than their landlords.
Such tenants will even sublet all or part of their units (often illegally) at market rates, thus having their rents fully paid for by the subtenant, on top of a profit.
Rent control often does “take from poor to give to the rich.”
Lol zigzag Lol.
A reader’s comment I saved from the Washington Post last year.
>> I’m being pushed out of buying a home in my own country, and frankly I’m not looking forward to moving to China and working/living in an Apple factory. I can see why people are pissed off… <<
Hate to burst your bubble, but your belief is incorrect. Most landlords just funnel the money into investment accounts, trust funds and off-short accounts and sit around living off the interest. They don’t “spend money in America” nearly as much as a middle class family with disposable income going to restaurants once in a while, or going on vacation, or just getting the healthcare and medications they need instead of putting it off to pay for housing. The wealthy landlords hoard their money, often investing it in the very companies that make those Chinese goods you don’t like the rest of us spending money on.
They also spend a lot of that money lobbying Congress for bigger tax breaks…which I suppose it technically spending money in America, except the lobbyists and Congresspersons will invest it just the same way the landlords would have.
And then of course landlords like to jetset around the world, spending their money in all sorts of other countries.
At least when you let the middle class retain money, they’ll go to restaurants, go to movies – one of the last American industries – vacation in the US, pay for gas to go visit Grandma. Overall, considering how vastly middle class people outnumber the wealthy, a middle class with disposable income is probably going to “spend more money in America” than the wealthy landlords ever do.
My source? I’ve worked in business management and been involved in helping landlords invest their money.
You should also note that many “landlords” are in fact just trust funds comprised of investments from wealthy individuals looking for a tax break.
What current investment pays sufficient returns to allow one to “sit around living off the interest”? Many become landlords today as traditional investments don’t pay returns that outpace inflation.
An American landlord? What’s that? I’ve yet to meet one that doesn’t have a strong accent.
The accent doesn’t mater if they have US citizenship, live here, spend here and invest here. They also pay property taxes and income taxes in US.
the American landlord has been replaced by institutional international bankers. Such a Wagner.
@ IRA, you are misinformed. the majority of the recent cash investor movement/new landlords are foreign investors. Money is not going back into our economy. They are building their wealth at the expense of our economy.
“Landlords spend money in America.”
This was really a weird idea. Reality is quite different: Capital gained is transferred immediately to tax haven and it is not spent, anywhere.
Use capital to grind more capital, that’s the rule.
Sure, but what we’re really talking about is money ending up in fewer and fewer hands. The landlords already had wealth – their properties. Now with rents going higher and higher, they have even more wealth.
I can testify to the rent increase in the bay area. In Belmont, I’ve seen mine jump 22% in the last 2 years. Last time I checked, I didn’t get a pay increase of 22%, more like 5%. To the doctors point, this has cut my discretionary spend a lot, thus no more random purchases, eating out, nor vacations.
You’re assuming that 22% is pure profit for the landlord. You don’t know how much the landlord’s expenses have gone up (e.g., utilities, fuel, insurance, repairs & maintenance, legal and accounting expenses, on-site employees, and a wide assortment of taxes and fees).
Who cares what the landlord has to pay out? Bay Area landlords are the greediest landlords in the world bar none. Most have properties paid off for years and are ok holding off the market until they find a renter who will pay through the nose. Prop 13 makes holding costs virtually 0.
LAer, you complain that landlords charge too much rent. But you also complain that landlords keep units off the markets and thus charge nothing.
Seems that no matter what landlords do, they’re exploiting poor tenants like you.
As for “Who cares what the landlord has to pay out?” — well, LAer, YOU should care. If you want to rent, then you should care very much what a landlord’s expenses are, because those expenses must be passed on to tenants.
Or do you imagine that a business’s expenses are wholly unrelated to what it must then charge its customers?
Son of a landlord, I’m going to guess you’re not the son of a big corporate landlord in L.A. or S.F, where there are always 10 other potential renters in line behind you. I’m guessing your parent is operating on a much smaller scale and, like all small businesses, struggles at times. I get it.
But most corporate landlords – and I had quite a few in L.A. over the years, because most properties are owned by companies, not individual landlords – do not pay for repairs unless they’re sued. I literally had one tell me I had to sue them to get them to repair a flood in the bathroom caused by their negligence in a neighboring apartment. So they preferred to hire a lawyer for small claims court rather than a plumber. I don’t think these people are struggling to keep a small business afloat.
Son of L., what you say makes perfect business sense for business people. However, for many bloggers here you confuse them with facts.
For those who never run a business, you just prick their bubble/utopia. They would really love to bring communism to USA. Every time you talk to someone in a communist country or who was brainwashed by communism, you hear the same thing. I am so used to that line of thinking (or should I say lack of it???…)
SOAL; that’s nonsense in my opinion.
There is a rent ceiling tenants can pay in a market – and competition in the market.
Some landlords may be late entrants, or over-leveraged postions vs other landlords who may own outright. Try to charge too much because of your ‘expenses’ may leave you with rental voids (no tenants). Trying to squeeze tenants for too much may have a depressing effect in the wider economy.
Californians pay high income tax and high sales tax, but low inheritance tax and low capital-gains tax. This is a recipe that ensures the rich will always get richer and the middle will get stuck, even if they achieve a career with a good salary.
Meanwhile, housing costs soar so middle income can only afford a shack or they rent and that climbs, limiting ability to save for a home. Government only seems to help the poor or the rich, never those trying to be upwardly mobile.
Maybe RENT is what needs to be tax-deductible instead of second mortgages and boats!
California is a one party state. If you don’t like the Democratic Party representing the rich landlords, then move. In a one party state, there is no incentive for people to vote, hence it is less expensive to buy off the incumbents. Hollywood, the movie industry, gets state subsidies because they also know how the system works.
Ever heard of Orange County, CA? Not one Democrat… not even one! 8-D
iGabby, California’s (Franchise Tax Board’s) rates are the same for income, dividends, and capital gains. Federal tax rates differentiate between ordinary income and investment income.
True, but only half true: You can always move your capital, all of it, into international tax haven and after that, all the profits are tax free. For ever.
For salary this is highly illegal and IRS is really paranoid for even the attempts to do so.
So tax-% on paper is irrelevant when it’s trivial to avoid it totally, for some.
You’re wrong. Government pays lip service to the poor.
That’s so true. Most of the taxes go to the super wealthy (0.01%) and crumbs to the poor to buy votes. Most of the poor are too ignorant to understand that. In the process, the middle class gets decimated.
When the politicians say they want to tax the rich, they mean doctors, lawyers and small business owners who are rich just by comparison with the poorest. They never mean to tax the super wealthy like Soros. That is why the concentration of wealth to the 0.01% continues regardless if you elect Democrats or RINOs. They just want total world domination and control – NWO. The doctors are not an obstacle for them – they don’t have any real power, but that is what they mean by taxing the rich. If you don’t believe me, just ask Buffet and Soros how much taxes they pay. Obama and the Democrats are even more generous to them because they are their contributors.
Left, right, left, right, the sheeple are led over the cliff.
I am seeing people move out of the San Fernando area into Simi Valley and as far as Lancaster due to the rent increases.
Can’t afford to live (rent) in California?
Move to the Midwest after you find a job there. You can live like a normal human being with your own little house. Decent homes in safe neighborhoods with real schools go for around $90 a square. Plus, the people are friendlier and don’t drive like they’re perpetually late.
That’s my advice.
🙂 excellent advice. you have to move to North Dakota though. That’s where the jobs are. And it’s really really really cold in the winter. And it’s almost always winter.
Lynn, if the the cold bothers you, come on over to Texas. We are a big state with a climate that you will like. I live near Kerrville, where Kinky Friedman lives. I make a powerful chili for a cold SoCal day.
“I live near Kerrville, where Kinky Friedman lives.”
So what? You act like that means something.
You’ve already proven you’re a racist, so that doesn’t bode too well for you or Texas. No offense.
Thomas, every location has its positives and negatives for the individual. You like the Westside where the folks are PC but then you complain that you do not make enough money to afford to live there and afford their lifestyle(e.g MB S class and the private schools, e.g. Marlborough ). Yes, in Kerrville, we have cheap real estate and the lifestyle(free public schools and used pick up trucks) that you can afford, but you would be complaining about the lack of PC, so you stay in SoCal and complain. Some people just like to complain like some New Yorkers.
PC , bah, bah, bah. Strawmen! Change the subject anyway you choose. On the last post you called the President “boy”. Anything you have to say should be seen that light of ignorance! You don’t get off the hook that easily.
Mr. Thomas, in the south, “boy” refers to immaturity which can cover many politicians, and as well as yourself. You may be interested that President Obola is referred to as the Long Legged Mack Daddy by the Black Pastor Manning (of NYC), on You Tube.
Mr Big Tex, this is a Southern Calif hosing blog. When many people of a certain age in California – or anywhere in the non-South – hear a Southerner refer to a person of any non-Caucasian identity as “boy,” we recall a painful and ugly time in our country’s not-so-distant history when such a term was used commonly and colloquially by Southern folks to demean and degrade an African-American person.
In other words, given your context, it sounds extremely racist.
By using that term or making any claims that such a term is acceptable in this context, @Thomas is completely correct in asserting that your comments on this blog have been completely negated.
Ignorant and racist attitudes are a big reason why people from California are hesitant to move to Texas.
Seattle PC Investor–WASHINGTON — During an event at an African-American church in Paterson, N.J., Gov. Chris Christie used the word “boy” during a heated exchange with a man in the audience. The governor has a loose and colloquial style, and no history of racial animus in his past, but his remark and how it’s been heard by the black community underscores the challenge Republicans face as the party begins its post-election outreach. (Per Huffington Post). Why do grown women refer to grown men as boys(such as yourself)?
Seattle PC, I bet that the rain drives you crazy with cabin fever. How is that other white meat there?
Again, ignorant and racist attitudes, like the one constantly on display by Mr Big Tex, are a big reason why people from California are hesitant to move to Texas.
One Chicago winter will send them back to sunshine land pretty quickly.
big John, unless you are young and have to move to the Midwest for a great job oppertunties then moving to the East or Midwest from CA. is like moving back to your old neighborhood, not a good idea?
All the replies to this thread are valid. Yes the job wage to housing cost ratio is better, yes the people are nicer and the public schools are generally better, especially in lower income areas versus CA lower income schools. But the weather is a huge factor in daily life.
You can move to Tijuana. San Diego weather with midwest prices.
Really, most of the bloggers complaining about the SoCal house prices, that’s all they can afford based on their wages – Tijuana RE. Hey, at least climate is good!!!!…
Momentum has clearly shifted, and we’re heading into the “slow season”. Spring is a long time away.
Down we go. http://i.imgur.com/m2oo4sF.png
Just came across this on twitter. Yikes.
http://sfist.com/2014/10/28/studios_in_huge_new_complex_between.php
Who says I need a house and “stuff” to be happy? You can keep your overpriced houses.
Doc: Folks in San Francisco are seeing a rental market on steroids…. Having rents grow at a faster rate than wages is problematic.
_____
I can’t take much more; it is deeply troubling this situation, and unfair for so many independent younger productive workers. BTW.. I don’t tend to read ZH, but just glanced at an article suggesting a drop in San Fran.
_____
“Roads are made, streets are made, services are improved, electric light turns night into day . . . and all the while the landlord sits still…. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.â€
-Winston Churchill speech in 1909
So many quotes are attributed to Winston Churchill, almost as many as to Lincoln. And many of them are apocryphal.
But if Churchill had really said that, then England must exempt landlords and landowners from all taxes and fees.
In which case, how is it that so many English lords lost their estates to taxes? How is it that so many English manors were sold and converted into hotels, schools, museums, and are today owned either by businesses, government entities, or rock stars?
Update; actual quote in full:
_____
Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains— and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.
-Winston Churchill speech in 1909
What $2 million buys in Pacific Palisades: https://www.redfin.com/CA/Santa-Monica/314-Amalfi-Dr-90402/home/6840670
With an assessed value of $353K, no less. I love Prop 13…
the $2 million dollar house featuring Ikea furniture throughout must mean the end is near….that makes zero sense!!! AND that house isn’t worth the $350K appraised value.
at some point reality HAS to come back in fashion.
Homeownership in America Has Collapsed—Don’t Blame Millennials
http://www.theatlantic.com/business/archive/2014/10/homeownership-is-historically-weakdont-blame-millennials/382010/
Thoughts on this type of reporting? Seems more like they are missing the point and just trying to rile people up. I can only assume this was written by a millennial?
Greedy, unsympathetic wall street landlords will be very, very bad for Joe Six pack and the lower to middle class
California has always been an enigma. The realities of the new economy simply magnify the issues in a place like So. Cal. especially. Drive from Santa Monica to Newport Beach .. on either end upscale, trendy, monied. In between it is only variations of ‘just getting by’! By any measure much of the L.A. area is simply depressing! How can people think a shack is worth $750k or an apartment is worth $2500/month in anything but a nice neighborhood and those are few and far between in L.A. anymore. Go almost anywhere else except L.A., S.F. , San Diego, and that $750k is a really nice neighborhood, and $2500/month gets a nice pad in a desirable location!!!
Dr HB, I have been discussing this for quite a while-over the past three years- with friends, who are either trying to decide between buying and renting, until we get a new admin in D.C.
The large corporate landholders are funneling that cash into accounts, yes. It is the landlords that have only a few homes (or even a small multiple unit property) that are pinched. The property taxes are insane in most urban and suburban areas, along with rising utility and insurance costs.
For a number of landlords, the money that comes in goes out, esp if they are still paying a mortgage on the property. They can ask for more money each year but it reaches a point when tenants choose to downsize (if possible) and seek cheaper rent.
Consumers won’t save nor have anything to spare for recreational spending, at this rate.
I keep reading these optimistic retail projections for the holiday season but the reality looks different. This Xmas will not be as merry for some, as they have a lot of pressure on their income for necessities. One has to have a warm home to unwrap those presents in, after all.
Thanks.
And exactly what wonderful improvement in conditions for home ownership do you and your friends believe will result when the White House flips from Blue to Red?
Nothing changes, does not mater how many politicians you change. They are paid for and represent the FED. If you want to see change abolish the FED – take their business license .
Left, right, left, right, the lemmings go over the cliff with wishful thinking.
Elect people like Ron Paul or Kennedy (who tried to abolish the FED was “conveniently” shot). Till then, keep marching: left, right, left, right and hope for “hope and change”…all you’ll have left in your pocket will be “change”
Apolitical…Let’s start with tax corp. rates reduce, incentives for small business, smaller Gov’t, want me to continue or explain why Obama was a disaster, which would take one sentence?
Not supporting either Team Red or Team Blue here (hence my handle), but compare conditions in 2008 to those in 2000, then compare conditions today to those in 2008 and tell me how much more of a disaster Blue has been than Red…
Adding my voice to your chorus, Apolitical. Nothing will change because there is not much diff between the two parties. A bird needs two wings to fly, after all.
We are living witnesses to the permanent change in American living standards. Good grief.
There will be presents this year. And there will be a LOT of driving. We have a glut of gas and oil in the pipeline and this sharp decrease in gas prices will allow for travel and holiday gifts, but not much more than that.
The glut of gas means the world economy is slowing down.
What I am seeing here in SoCal is 1/2 empty restaurants whereas two years ago these same places required reservations several days in advance.
How’s that QE forever idea going?
…crickets…
Well, QE4EVER is still on the table. QE was supposed to be an exception. Then came QE2, Operation Twist, QE3. So i wouldn’t rule out QE4 just yet. It might be till next year, but the markets(Treasury and Stock) are dependent on QE. Without it they will soon begin to collapse in my opinion.
There will be no QE4. Mortgage applications are at a 20 year low and the Federal deficit is shrinking rapidly. These are the two sources for QE purchases. The only thing the Federal Reserve can do is keep their balance sheet at $4.5T. The Fed will not be shrinking their balance sheet but they cannot expand their balance sheet either. So in effect, keeping their balance sheet at $4.5T is a sublime form of QE.
So the complaints are that that rents are too high and that houses are overpriced to buy; so what is your solution?
Flyover…FYI, in principal Kennedy was shot because he underestimated the power of the Mafia, he thought the mob was dying, like Obama thought terrorism went away when Bin Laden died. Evil is always with us, it never really goes away.
Abolish the Fed was down the ladder as to why they made him go away?
I think you mean “principle” and not “principal.”
Principle — an abstract concept. “It’s the principle that counts!”
Principal — chief in importance, or first in line. As in the Principal of a school. Or “The film begins principal photography on the 15th.”
My PRINCIPAL goal for 2015 is to buy a nice house, because living in a nice house is an important PRINCIPLE of good living.
Wage growth… I believe a avg is what 56k a year a very ridiculous number in the year 2014. Million dollar house in 2014 yes it is just a number, it would all be relative if people made between 200 to 250k a year
Very wealthy folks and the powers to be decided many years ago pensions and wage increases were not good for the bottom line.
Matter of fact wealthy income has gone thru the roof and they now own 4 or 5 houses and many exotic cars etc.
It was so easy for the fat cats to ship our economy to a service industry and let China play in the big leagues now.
We have our selves to blame, American people have all the power nobody believe Uncle Joe would lose it all, or health care would drive you broke.
No most just said to bad for them it can’t happen to me, yes it did and now most may never really recover.
The wealthy are now very use to bringing down the American worker, part time, no health care, “DON’T DARE ASK FOR A RAISE OR PENSION. YOU SEE IF YOU GOT IT THEN THE WEALTHY CAN’T BUY A 6TH HOME OR 20TH CAR, THEY ALSO HAVE TO KEEP UP WITH THE MICROSOFTS OR BERKSHIRES, OR BTW WHAT HAPPEN TO THE JONES, THEY WENT BROKE LONG AGO.
Compensating for cost of living (see Table 4, SPM “Percentage”).
Having lived there for 20 years and have had family there for about a century, I can attest to it. There are a LOT of poor people in California (Arizona, Nevada, New York). Even though the popular media outlet doesn’t understand the tremendous cost of living differences, many of the “poor” southern states have lower poverty rates than the “rich” coastal states.
http://www.census.gov/prod/2012pubs/p60-244.pdf
I think you mean “principle†and not “principal.†Landlord thanks for the lesson
My principal in HS in principle was a nut. I understand, in principle houses are to high, but a principal may be able to afford one.
I will repeat it several times till I get it right. BTW, spell check makes everybody look like they were Phi Beta Kappa on the internet, I type to fast, spelling and conjunctive sentences just get in the way, I like it simple… two eggs, hash browns, toast and coffee, eggs benedict not so much?
No, spell checks make everyone look ignorant on the internet, because spell checks “pass” many words that are actual words, but not the word intended by the context.
For instance, even now you’ve twice written “to” when you meant “too.”
Not that you’re unique. It’s everyone. Only occasionally do I intervene to correct, otherwise I’d be doing nothing else.
PS: I’ve also worked as an editor over the years. Even been paid for it.
I had no idea about this. Pretty interesting subject for sure though.
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