Despite a Housing Recovery, Middle-Income Families Are Increasingly Losing Ground on Affordability

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Deepening income inequality across the U.S. is dividing the housing market into winners and losers among renters and owners, the middle class and wealthy, and racial groups.

An annual report from Harvard University’s Joint Center for Housing Studies, the State of the Nation’s Housing, reveals that even while the housing market begins to recover and regain solid footing, large parts of the country are being left behind.

The number of American households paying more than 30% of their incomes on housing – a number that economists consider sustainable — ticked up to nearly 40 million in 2014.  That is particularly concerning because that number had been trending down for three years, suggesting the rental affordability crisis persists despite recent income growth. Middle-income families are increasingly losing ground, facing housing affordability challenges that were once largely limited to the poor. In the 10 highest-cost housing markets, half of renters earning $45,000 to $75,000 a year in 2014 paid at least one-third of their incomes in rent.

One reason middle-income renters are struggling to find an affordable apartment: Developers are catering to a growing number of affluent renters. While newer rentals have always commanded higher prices than older units, the premium for new apartments has risen sharply, the Harvard report finds. The median asking rent for new apartments built in 2015 was $1,381 per month, more than 70% higher than the overall median rent. The rent premium for new studio apartments was even more stark, at 90% above the overall price for a studio.

“It is just astounding how universal it seems to be” that the majority of new rental apartments in cities across the country are at the high end, said Chris Herbert, managing director of the Joint Center for Housing Studies.

The report also finds that the number of families living in poor neighborhoods has more than doubled since 2000, to nearly 14 million. A quarter of poor blacks live in poor neighborhoods and 18% of poor Hispanics, compared to just 6% of poor whites.

Other key takeaways:

Renting continues to boom
Last year marked the largest single-year jump — 1.4 million — in new renter households. That is good news for developers, who are planning to build the most new apartments in three decades. But it is also a sign that even as the housing market recovers, many households are still renting rather than buying due to the lack of availability of mortgages, challenges saving for a down payment and a shortage of affordable starter homes.

Signs first-time buyers could soon return
Income growth is picking up, especially among young adults, which could bode well for their ability to save for a down payment and afford a house. Overall, the real median income for all workers rose 1% in 2014, the third year of increases. Young adults ages 25 to 34 saw an even bigger jump of 2.3% and 4.1% for workers ages 35 to 44. Nonetheless, incomes for young adults remain 9% to 18% below previous peaks.

Still, young adults are continuing to live with their parents – especially in costly cities
The share of 25– to 34-year-olds living in their parents’ homes rose to about 22% in 2014 from 17% in 2008, according to U.S. Census data. In the 25 most expensive metro areas, such as New York, Los Angeles, Philadelphia and Fresno, California, the share of young adults who are the head of a household is 10 percentage points lower than in the most affordable metros.