What a difference one month makes. From the fourth quarter 2022 to the first quarter 2023, the number of US primary metros still experiencing higher rent burdens plummeted from 49 metros down to only five, a 91% drop. RTI – the percentage of gross income a median-income tenant pays for the average monthly rent – finally cooled after more than three years of steepening rates nationwide, Moody’s Analytics has announced.
Rent burdened is defined as a typical household paying 30% or more of its income to rent; severely rent burdened means the percentage goes up to 50% and the number of renters that fall in these categories is finally starting to ease.
The news has been long awaited and is significant. “The fever is finally breaking,” wrote Lu Chen, Senior Economist, and Mary Le, Economist, of Moody’s Analytics. According to them, “Since Q4 2019, 82% of metros had higher rent-burdens compared to pre-Covid because rent disproportionately rose faster than incomes.”
What had made it tough for renters was that rising mortgage rates stopped many from buying a home and caused them to have to continue to rent, adding to the larger pool. “Apartment demand surged as a result and drove rates sky high,” wrote Chen and Le. The authors attribute the moderation and decline in rent growth now to affordability pressures and slowing migration.
But they advise caution since the situation may not be permanent as other factors are at play and an inflection point hasn’t yet been reached. For one, the cost of housing remains elevated relative to wages when compared to prior decades. For example, in 1999, only New York City was rent burdened with the median household allocating 53.5% of income to the average-priced apartment. Today, seven U.S. metros fall into this category besides NYC such as Miami, Fort Lauderdale, Los Angeles, Palm Beach, Northern New Jersey and Boston.
Second, the pandemic exacerbated the numbers with the Rent to Income ratio (RTI) increasing first in New York City. Between the last quarter 2019 and first quarter 2023, the RIT rose 8.4% there. Other metros followed to become rent burdened. Worse is that in the last quarter of 2022, the U.S. became rent-burdened nationally for the first time in the almost 25 years that Moody’s Analytics has tracked such numbers. “As wage growth trails behind the cost of shelter, Americans are feeling financially distressed,” wrote Chen and Le. They predict that rent growth will remain around 2% annually, putting national RTI at a mostly flat 29.7% for the year.