Rental-housing market faces affordability crisis

The Scotsman Guide - Victor Whitman - 07 April 2017

As house prices continue to rise nationwide, outpacing income growth, a rent-affordability crisis has gripped the nation, with the most acute effects being felt among predominately black and Hispanic neighborhoods, according to recent research by real estate database company Zillow.

Renters in primarily white neighborhoods, the Zillow research shows, spend about 31 percent of their income on rent. By contrast, renters in predominately African-American neighborhoods dish out nearly 44 percent of their income to landlords, while renters in Hispanic neighborhoods pay an even steeper price, with 48 percent of their income going toward rent.

“This research sheds light on another example of inequality in the housing market,” Zillow Chief Economist Dr. Svenja Gudell said. “Renters in African-American or Hispanic neighborhoods find themselves in a Catch-22 situation — while owning a home is a great way to build wealth, you need to save up some cash to be able to buy. If you're spending close to half of your income on rent, saving up that downpayment is going to be incredibly difficult.”

Although housing affordability for renters has been declining nationwide for the past five years — largely because housing costs have outpaced income growth — that trend line has been more pronounced in predominately minority neighborhoods, compared with white neighborhoods. Zillow reports that since 2011, the share of household income required to pay rent has jumped by 4 percentage points in black neighborhoods and 7 percentage points in Hispanic neighborhoods, compared with 3 percentage points in white neighborhoods.

Ironically, the rental-affordability crisis for African Americans and Hispanics is more severe in those cities offering the most promise of upward mobility for minorities.

“In markets that offer the best opportunities for social mobility, paying the rent in minority communities is an even bigger financial burden, mainly due to significantly lower incomes in these communities,” Zillow reports. “In San Francisco, for example, rent in predominantly black neighborhoods requires nearly three-quarters of the median income there. In largely Hispanic neighborhoods, renters can expect to spend 62.5 percent of their income on monthly rent.”

The crisis in rent affordability also has made it increasingly difficult for renters across all racial communities to save for a downpayment for a home purchase. Housing prices have risen 76 percent since 2000, while the increase in per capita disposable income over that period lagged behind at 72 percent, according to data from Freddie Mac.

“With inventory tight, home prices outpacing incomes and interest rates headed higher, affordability has declined, putting a pinch on prospective homebuyers,” a recent Freddie Mac report states.

In the most extreme cases, the rental-affordability crisis also feeds another national crisis: homelessness.

“More than 71 percent of extremely low-income renter households in America spend more than half of their income on rent, putting them one financial or medical crisis away from homelessness,” the National Low Income Housing Coalition reports. “Additionally, over 500,000 people in the United States are homeless on a given night.”

As housing costs continue to spiral upward, renters are forced to make hard financial choices, “like putting off saving for a downpayment, medical care and planning for retirement,” the Zillow report states. “Homeownership can be an important path to building wealth, but making the transition from renter to homeowner is a bigger financial challenge for renters living in mainly black or Hispanic areas,” Zillow concludes.

On the bright side, for those renters who do manage to make the transition to homeownership, monthly mortgage payments prove to be much more affordable than rents, regardless of race. Mortgage payments for homeowners in black communities account for 13.6 percent of median household income and 22.8 percent in Hispanic communities, Zillow reports. In white communities, 15.2 percent of median household income goes toward paying the mortgage each month.