John Rubino: Still Think There’s No Inflation? Check Out These Affluent Renters Who Can’t Afford A Home

Home prices are soaring beyond the reach of many seemingly affluent Americans. Here’s what’s going on, and here’s why…
by John Rubino of Dollar Collapse

Generally speaking, if you can afford to buy a decent house you do it. Owning is viewed by most people to be both simpler (no worries about your landlord selling a rental out from under you) and a better financial deal. And of course there’s the status of home ownership. When you rent, people wonder why you can’t afford to buy. When you own, they view you as a higher class of neighbor.

Yet a growing number of affluent Americans are now renting. From today’s Wall Street Journal:

So You Make $100,000? It Still Might Not Be Enough to Buy a Home

DENVER—For Janessa White, the American dream of a red brick house on a tree-lined street blocks from a good elementary school remains obtainable. She just has to rent it.

Ms. White and her boyfriend moved with her 7-year-old son from Missouri to Denver last year. In Missouri, Ms. White owned her home, which she bought for a little over $100,000. To buy a house like the one she rents in Stapleton, an affluent section of the Colorado capital, would cost about four times as much. Even though her household’s income is in the low six-figures, homeownership is daunting in Denver.

“It’s hard not to want to buy,” she said. “Saving for a huge down payment seems almost impossible.”

Ms. White’s household is part of a growing camp: high-earning Americans who are renting instead of buying homes. 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.

“I can’t think of anyone we’ve rented to recently who didn’t make $100,000,” said Bruce McNeilage, who owns 148 rental homes around the Southeast and is building 118 more.

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.

In each of those cities as well as in Seattle, Cincinnati and Ann Arbor, Mich., the number of six-figure renters doubled or better between 2006 and 2017, making them the fastest-growing segment of renters in these markets, according to the Journal’s analysis.

During that period, which began just before the housing market imploded in 2007, the number of renter households in the U.S. grew 25% while the number of homeowners was nearly flat, according to the U.S. Census Bureau. Since 2017 home buyers have started returning to the market, but not nearly enough of them to offset the decade of new renters.

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.

Those who do want to buy a home face the additional hurdle of high prices that have surged beyond the reach of even relatively high earners in cities with strong jobs growth. Prices in 75 of the country’s 100 largest metro areas have surpassed their precrash highs, not adjusting for inflation, according to mortgage data and analysis firm HSH. Many of those cities, such as Salt Lake City and Raleigh, N.C., also have some of the fastest growth in high-paying jobs. The sharpest recovery, according to HSH, has been in Denver, where home prices have doubled since 2012 amid an influx of California tech workers and New York finance firms. Prices are nearly twice their precrash high.

It takes an annual household income of about $90,000 to afford Denver’s median-priced house, which costs around $471,000, according to HSH. But that is assuming buyers have 20%, or about $94,000, for a down payment.

“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.”

To summarize, US policy of running massive government deficits while encouraging (via unnaturally low interest rates) everyone else to borrow like crazy has sent home prices soaring beyond the reach of many seemingly affluent Americans. Yet this obvious inflation doesn’t show up in official statistics because houses (along with stocks, bonds, and fine art) are “assets” and so don’t belong in the “cost of living.”

What comes next will be nice bit of poetic justice. The current financial asset boom is long in the tooth and will therefore end pretty soon, causing house prices to tank and many of today’s home buyers to regret their decision. Renters, on the other hand, will be glad they dodged that financial bullet.