Tag Archives: Median household income

JCHS: Housing Recovery Unlikely to Ease Renter Cost Burdens

Housing Recovery Unlikely to Ease Renter Cost Burdens

by Chris Herbert
Research Director

The headlines continue to trumpet good news about the housing market, including falling vacancy rates and increased construction in rental housing markets across the country. But the flip side of this good news for the rental market is that the share of renters who face severe cost burdens, paying more than half their income for housing, has surged in recent years. As documented in our most recent State of the Nation’s Housing report, the number of renter households facing severe cost burdens reached a new record of 11.2 million in 2011, an increase of 2.5 million households since just before the recession in 2007 (see Figure 1). To make matters worse, this rise comes on the heels of what had already been a decade of worsening rental affordability; the number of renters facing severe housing cost burdens increased by 1.4 million between 2001 and 2007.  In all, the decade from 2001 to 2011 saw an increase of more than 50 percent in the incidence of severe rental cost burdens.

Notes: Severely cost-burdened households spend more than 50 percent of pre-tax income on housing costs. Source: JCHS tabulations of US Census Bureau, American Community Surveys.
To a substantial degree, the sharp rise in renter cost burdens reflects the significant growth in the number of low-income renters who are most likely to struggle to afford housing.  Between 2007 and 2011 the Great Recession pushed the number of renters earning less than $15,000 up by 1.8 million, while those earning between $15,000 and $30,000 rose by 1.1 million. ($15,000 roughly corresponds to what is earned by those working year round at the federal minimum wage.) But over the same time frame, rising rents made it even more likely that households within these income bands would face severe burdens.  Over this four year period, the share severely burdened households among those earning less than $15,000 rose from 67 to 71 percent, while among those earning between $15,000 and $30,000 the share rose from 29 to 33 percent.
But while the number of low-income renters has risen sharply, the supply of housing they can afford has at best remained stagnant (see Figure 2).  In 2011 there were 12.1 million extremely low-income renters who earned 30 percent or less of median incomes in the areas where they lived.  (This is a common income cutoff for eligibility for housing vouchers and is roughly equivalent to our $15,000 threshold but is adjusted for differences in area incomes and family size.)  Meanwhile, there were only 6.8 million rental units affordable at this income cutoff, representing a gap of 5.3 million housing units.  The shortage of affordable housing is made worse by the fact that many of these affordable units are occupied by higher income households. When the number of units affordable for extremely low-income households and available to them is considered, the supply gap in 2011 was even larger – 7.9 million units.  The magnitude of this supply gap testifies to the fact that it is nearly impossible to produce new housing at such low rents, and almost as difficult to maintain existing housing. In fact, 650,000 housing units renting for less than $400 a month in 2001 were permanently lost from the housing stock by 2011.
Note: Extremely low-income households earn less than 30% of area median income.
Source: JCHS tabulations of US Census Bureau, American Housing Surveys.
With the market unable to supply housing affordable for the nation’s lowest-income households, addressing the problem of rising rent burdens may largely come down to efforts to increase household incomes. But there will always be some households facing temporary financial struggles and others facing long-term challenges who will need more assistance to afford decent housing. Currently, only one in four of those eligible for federal assistance are able to obtain subsidized housing. Those who do are among the nation’s most vulnerable families and individuals – 35 percent are disabled, 31 percent are age 62 or older, and 38 percent are single parents with children. With the population of households struggling to afford housing at record levels and continuing to expand, there is a compelling need to assess whether existing resources for assisted housing are both sufficient to meet the need and being used effectively through current programs.
But while options for reforming the housing finance system have been subject to a vigorous debate, to date the issue of how to address the significant problem of rental housing affordability has received relatively little attention.  The Bipartisan Policy Center’s (BPC) Housing Commission report this past year was a notable exception as it both framed the importance of this issue and advanced specific policy options that should be considered.
The next snapshot of renter cost burdens will come this fall when the 2012 American Community Survey is released.  But as we showed in this year’s State of the Nation’s Housing report, rents are continuing to increase in markets across the country, against a backdrop of continued stagnation in household incomes. As a result, it is likely that this more up-to-date data will once again find that rental housing affordability has only gotten worse. Hopefully, the BPC report will start a dialogue on what should be done to address this urgent problem.

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JCHS: Despite Rising Home Prices, Homeownership More Affordable than Ever

Despite Rising Home Prices, Homeownership More Affordable than Ever

 by Rocio Sanchez-Moyano
Research Assistant
For those able to obtain loans in today’s constrained credit environment, the monthly cost of homeownership is at historic lows, thanks to low interest rates.  Though the National Association of Realtors’ median single family home price increased by 6 percent in 2012, falling interest rates have made mortgage payments cheaper: assuming a 20 percent down payment and 30-year fixed-rate mortgage, monthly payments on a median priced home in 2012 were $644. Compared to median incomes, payments are lower than they have been in more than two decades.

Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors;  US Census Bureau, Moody’s Analytics Estimates.

The record low interest rates available in 2012 helped reduce monthly mortgage payments in 82.9 percent of metros from 2011 to 2012; payments also declined in 80.3 percent of metros that experienced price gains.  Even in metros with substantial price appreciation, such as Phoenix (24.6 percent) and San Francisco (11.9 percent), growth in mortgage payments was muted, rising 13.3 and 1.7 percent, respectively.  In fact, interest rate declines over the last year were enough to offset price increases of up to 10 percent price appreciation.

The current interest rate environment would keep payment-to-income ratios affordable for median buyers in a majority of cities even under much larger price increases.  Following the methodology used by the National Association of Realtors (NAR) in calculating their housing affordability index, a mortgage payment is considered affordable if it represents no more than 25 percent of monthly income.  Using this as a threshold, mortgage payments on a median priced home were affordable in more than 95 percent of metros in 2012.  Even if house prices were to rise by 20 percent, without a change in interest rates, 91.5 percent of metros would remain affordable to the median buyer.  In fact, the cost of a nationally median-priced home would have to increase by more than 56.7 percent to become unaffordable at the median household income.  Interest rates are so far below their historical average that few metros would become unaffordable to the median buyer even with moderate changes in interest rate.  For example, if interest rates increased to 5 percent, comparable to rates in 2009, only 2 percent more metros would become unaffordable to the median buyer.

Though mortgage payments are at historic lows, purchasing a home is still unaffordable for many prospective buyers.  In some traditionally expensive markets, such as the large California metros and Honolulu, monthly mortgage payments were already too costly for the median homebuyer in 2012.  For first time homebuyers, whose payments are approximated using a 10 percent down payment on a home priced at 85 percent of the median, and incomes of 65 percent of the median, 17.1 percent of metros were unaffordable.  The effect is more pronounced in the largest 20 metros, as 35 percent of them are unaffordable to first time buyers. (Click table to enlarge.)

Notes:  Payments and payment-to-income ratios for the median homebuyer assume a 30-year fixed-rate mortgage with 20 percent down payment on a median priced home and median income for the metro; for a first time homebuyer, payments and payment-to-income ratios assume a 30-year fixed-rate mortgage with a 10 percent down payment on a home priced at 85 percent of the median and an income of 65 percent of the median, as per the NAR first time homebuyer affordabilityindex. Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors; US Census Bureau, Moody’s Analytics Estimates.

While it is likely that homeownership will remain affordable in the short term, these historic levels of affordability may not last.  Prices increased in 86.6 percent of metros from 2011-12 and interest rates were slightly higher in the first months of 2012 than at the end of 2012, according to thePrimary Mortgage Market Survey issued by Freddie Mac.  Buyers who were waiting for the best deal as prices and interest rates continued to drop before entering the market may be spurred by current trends to think that this may be the ideal time to buy.

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