The Rise of the $100K Renters and What it Means

The Wall Street Journal has an in-depth article about the continued strength of the rental housing market in America, which is related to the explosive growth in households that earn $100,000+ and rent their homes. From the article:

In 2019, about 19% of U.S. households with six-figure incomes rented their homes, up from about 12% in 2006, according to a Wall Street Journal analysis of Census Bureau data that adjusted the incomes for inflation. The increase equates to about 3.4 million new renters who would have likely been homeowners a generation ago...

It isn’t unusual for high-earners to rent in pricey coastal cities like New York and San Francisco, where sky-high real-estate prices have long limited homeownership. Yet these markets account for less than 20% of the new six-figure renters, according to the Journal’s analysis…

Why are high-income households renting at a higher rate? One reason is debt:

A $100,000 income is still comfortably in excess of the median U.S. household income, which was $63,179 in 2018, according to the Census Bureau. But many Americans these days are mired in debt. They have car payments, credit-card debt, health-care bills and college loans. Student debt is particularly vexing for the younger Americans who are starting families.

There is a connection between student loans and the housing bust, which isn’t lost on young home buyers. Many students took out loans because the housing crisis wiped out the equity in their parents’ homes that would have helped pay for college. Since then the amount of student debt outstanding has tripled, to more than $1.6 trillion. A couple of years ago Fannie Mae, the government-sponsored mortgage giant, made it easier for borrowers with higher debt levels to qualify for a mortgage, though recently Fannie tightened its lending standards.

These higher levels of debt also make it difficult for potential home buyers to save up for a downpayment:

“The lack of savings for a down payment in this country is grossly underestimated,” said John Pawlowski, a housing analyst at Green Street Advisors, who estimates that the typical renter’s net worth is about $5,500. “Consumer balance sheets are not good.”

Finally, new home construction has not kept up with demand so that creates the added pressure of rapidly increasing home prices, which for many people makes it more attractive to rent:

Jacob Neuberger, a 30-year-old who works in Denver for an investment firm, considered buying when he moved out of his one-bedroom downtown apartment. He and his girlfriend opted to rent a townhouse for $2,700 a month. The one next door sold for $550,000. Mr. Neuberger estimated that his costs to own would be about 20% higher than renting and that he would need the townhouse to appreciate by about 10% to cover transaction costs if he needed to sell to buy a bigger home or if he had to move for work. “The price appreciation can’t go on forever,” he said.

While this story is focused on high earner households it actually does a very good job of explaining what is going on in the housing market in general: not enough new housing supply + higher household debt + lower household savings levels + a tighter mortgage lending environment = many more renters (especially higher-income renters).