Is rent still a cost burden for people living in the United States?
The cost of living in the United States has risen at a rate that many people are struggling to keep up with, especially when it comes to rent. What causes rents to rise sharply? Since 2020, there have been several factors that have caused the cost of rent to rise. One of the most important factors is inflation. Higher labor and supply costs cause landlords to pass these costs on to tenants. Not only is there a need for more inventory in the housing market, but there is a shortage of affordable rental properties across the country. This lack of inventory makes rental rates more competitive for tenants, despite increased wages. The shortage is also due to potential homebuyers who remain renters due to current housing market barriers. How deeply are rental costs cutting into Americans’ budgets and what are the impacts in Virginia?
Wages and inflation
According to recent Census Bureau data, the median household income (all household types) across the United States was estimated at $74,580 in 2022, which is lower than the $76,330 estimated for 2021. In Virginia, the median household income is $80,615, According to 2021 Census data. Down slightly from $82,214 in 2020. In 2022, US wages have been growing steadily but at a slower rate than inflation. This rise in the cost of living has many people worried about the overall economy, as their budgets took a big hit last year despite making more money. High wage earners are also marginalized due to low inventory and intense market competition. Most of these high-income earners can be somewhat aggressive in their search for a home to rent, which can lead to higher rental costs. The Fed’s efforts to raise interest rates have slowed inflation so far in 2023. Year-over-year inflation has been moderate in recent months, and many experts expect it to continue to slow through the end of the year. According to the latest Consumer Price Index, shelter costs contributed 90% of total inflation in July.
Across the country, the rent-to-income (RTI) ratio rose above 30% last year for the first time in 25 years. In the first quarter of 2023, a seasonal decline in the multifamily market reduced the ERR by 0.9% to 29.6%, according to Moody Analytics. Although rents may appear to be falling in some parts of the United States, they are still uncomfortably high.
In Virginia, rent grew 2.8% in the second quarter of 2023, significantly slower than last year’s second-quarter growth of 9.2%, according to our latest multifamily report. The Richmond metro area had the least rent growth, with a 1.3% increase in the second quarter compared to last year, and the Harrisonburg metro area had the strongest rent growth at 7.9% in the second quarter. According to Zillow, the cost of rent in Virginia is 5% less than the national average, and the average rent in the commonwealth so far this year is $1,989. According to federal standards, a household is considered “housing cost burdened” if it spends more than 30% of its total income on housing expenses and a payment of 50% or more means the household is “severely cost burdened.”
Housing costs remain the largest expense for most Americans. These expenses can be a burden on those who earn low wages and lack affordable rental homes to choose from. The multifamily housing market has faced pressure due to high demand, but low supply remains a major issue in the market.