You already know the rent is too damn high. But here’s fresh evidence that something’s amiss in the housing market: one metric of measuring housing costs has never been so high.
Rental income as a share of gross domestic product hit an all-time high of 3.86% in the first quarter, according to government data out Friday.
That makes sense: with lean supply and pent-up demand, it’s never been such a good time to be a landlord.
But it’s a bit more complicated than that. The government’s “rental income” data don’t just include income that people make renting out homes or rooms. It also includes what’s known as “imputed” income for homeowners.
As Sam Khater, deputy chief economist for CoreLogic, explains it: this measurement captures the cost of housing by estimating how much homeowners would charge themselves to live in the residences they own.
Homeowner rental income accounts for roughly 70% of total rental income, while tenant-paid rental income makes up about 30% — very roughly approximating the homeownership rate for the country as a whole.
But it’s not just bigger volumes helping push this measurement to all-time highs. Homeowner rental incomes are also surging, in part because homeowner costs dropped so sharply after the housing bust and recession.
In the aftermath of the downturn, home values nose-dived, distressed properties were plentiful, and interest rates were at all-time lows. In conditions like those, owners hold all the cards – even when they’re also the tenants.
That’s well and good for Americans who are already homeowners, but the flip side is that many renters have been stuck. Many have been unable to transition into homeownership, whether because of stricter underwriting and regulations — or because of what Khater calls “economic” reasons like unemployment or stagnant wages. And as home prices started to rebound, ownership became out of reach.
“The decline in homeownership and rapidly rising home prices are a driver of inequality,” Khater said in an interview. “As a lower proportion of Americans own a home and that’s the biggest portion of wealth, that drives a wedge between the haves and have-nots. Homeownership is a great way for the middle class to achieve wealth and those opportunities are declining.”
Khater has advocated developing housing policy to address supply — more options that are more affordable for ordinary Americans — rather than demand, with more attractive financing deals. For owners and renters alike, he said, shelter is the biggest expense. If policymakers addressed out-of-control housing costs, that would be “a great way to enhance living standards,” Khater said.
It’s also worth noting that the Commerce Department data that track higher rental incomes are most likely not capturing all the housing market nuances that have emerged since the Great Recession.
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During the downturn, Americans cohabited by necessity, and as baby boomers retire, many are opting to form multi-generational households with their children. Tens of thousands of Americans live in homes they own but rent part of it out, whether on a regular basis or for short-term stays, such as on AirBNB. Even more-transparent phenomena, like the rise of single-family rentals, haven’t been as well-documented as the housing arrangements that have dominated the market for decades.
“The changes in the industry are outpacing our ability to track it in the official statistical sense,” Khater said.