Housing costs burdensome relative to incomes

Since early last fall, I noted increasing affordability relative to rents. It’s now cheaper to own than to rent in many OC markets and most housing markets around the country. However, rental parity is a measure of affordability comparing one method of providing housing versus another. Rental parity does not capture the bigger picture of affordability relative to incomes. As it turns out, all housing is becoming less affordable as both owners and renters alike spend more on housing as a percentage of income than they used to. This is a troubling trend.

If people are putting more toward housing, then they are spending less on everything else. Perhaps landlords and bankers like this trend, but people who produce other goods and services are seeing less spending coming their way. To make matters worse, incomes declined in the wake of the 2008 financial crisis, and with high unemployment, workers don’t have the leverage to demand more. Flat incomes and increasing housing costs are squeezing the economy, and these problems will likely persist for the foreseeable future.

Despite Falling Prices, Housing Burden Still High for Middle Class

February 24, 2012, 10:43 AM By Alan Zibel

Though home prices have fallen dramatically as a result of the housing bust, paying the monthly cost of owning or renting a home hasn’t become any easier for many middle-income Americans families, a new study finds.

The study released Friday by the Washington-based Center for Housing Policy calculates the burden of housing costs for homeowners and renters with incomes of up to 120% of the median in their area by analyzing U.S. Census data.

Nearly 24% of those 45 million households spent more than half of their incomes on housing (including utilities) in 2010, up from about 23% in 2009 and 22% in 2008, the study finds. (It remains to be seen whether this trend will continue given the improving economic climate over the past six months.)

Despite the fact that we’re seeing declining home prices across the country, housing isn’t becoming more affordable,” said Laura Williams, the study’s author and a research associate at the policy organization. The report noted that in 19 of the 50 largest U.S. metro areas the number of households with high housing cost burdens actually increased between 2008 and 2010.

It stands to reason that housing costs as a percentage of income would rise during a period of falling wages. People can’t and don’t reduce their housing expenses quickly in the face of declining wages. Loan owners are stuck with their housing costs and can’t reduce them even if they want to. Renters have more control over their housing costs, but even renters will tighten their belts and stay were they are if they believe the decline in income is temporary.

Why? There are several reasons. Due to the rough economy, incomes for many families have fallen. The median household income of renters analyzed in the report fell to $30,229 in 2010 from $31,570 in 2008. For homeowners, the median household income fell to $41,413 in 2010 from $43,971 in 2008.

Meanwhile, rents have been rising. Plus, many homeowners haven’t been able to take advantage of record-low mortgage rates by refinancing their mortgages. That’s because they are “under water” – meaning that they owe more on their properties than the value of their homes.

The cost push of increasing rents is prompting many to buy homes. The clients Shevy and his team are working with all tell him the rising rents and lower cost of ownership is prompting them to lock in a lower housing cost through purchasing property with a fixed-rate mortgage.

The metro area with the largest share of households paying more than half of their income on housing was Miami, where 43% of households did so. It was followed by Los Angeles (38%), San Diego (37%), Riverside, Calif., (34%) and New York (34%).

It should surprise no one that people in Southern California are putting an onerous portion of their incomes toward housing.

The cities with the smallest share of households with a severe cost burden were Pittsburgh (15%), Buffalo (16%), San Antonio (17%), Rochester (17%) and Kansas City (17%).

Read the full report.

Download (PDF, Unknown)

The following are the key findings of the report:

  • The overall share of working households with a severe housing cost burden increased significantly between 2008 and 2010, rising from 21.8 percent to 23.6 percent.
  • The increase in the rate of severe housing cost burden among working households occurred exclusively for those earning less than 80 percent of area median income (AMI).
  • The incomes of working renters and working owners with severe housing cost burdens differ.

From the report: “As shown in Figure 4, nearly all working renters with a severe housing cost burden earn less than 50 percent of AMI while working owners with a severe housing cost burden are more evenly distributed across income categories. This difference is likely due to the fact that there are relatively few very low-income owners and that moderate-income owners are more likely to struggle to meet housing costs than moderate-income renters.”

Increasing burdens among loan owners crosses all economic classes, but only low-income renters are facing huge housing burdens. In other words, many of the readers of this blog are among the wise minority controlling their housing costs.

  • Since 2008, affordability has steadily eroded for working households in 24 states.
  • Nineteen of the 50 largest metro areas saw the number of working households with severe housing cost burdens increase between 2008 and 2010.
  • Fewer low- and moderate-income households have jobs that employ them for 20 hours or more per week.
  • Incomes for all households, working and not, have declined since 2008.
  • Since 2008, there has been a steady trend in decreasing costs for owners and increasing costs for renters.

The decreasing costs for owners is for new owners. Even those loan owners who received loan modifications and pay less today are still paying 31% of their income toward housing costs. Rents did fall from 2007 through 2009, but they have been rising since then.

What has happened to your housing costs over the last few years?