This Week’s Developments in the US Economy

Residential Affordability Coming into Sharper Focus

With the Fed’s large 50 basis point cut in the rear-view mirror, one of the chief concerns raised during Chair Powell’s Q&A session was the affordability challenge throughout the US. The recently released Census Bureau ACS data reinforces that challenge in many aspects, and we see three themes that are central to this challenge: First, affordability is not just an issue facing renters as we are seeing a rising share of cost-burdened homeowners; Second, we are seeing an increasing number and overall share of higher-income renters, which suggests a rising barrier to homeownership; and third, older households are driving a meaningful amount of residential demand, with older renters growing faster than homeowners over the past 15 years.

With elevated levels of supply driving questions for the residential rental sector, understanding the demand side of the equation comes into sharper focus. In the ACS data, we find that household formation continued its upward trend in 2023, with nearly 1.5 million new households added compared to the previous year. Renter households accounted for approximately 30% of this growth. However, a meaningful portion of both new and existing households—whether renters or homeowners—are cost-burdened, spending more than 30% of their income on housing. This rise underscores the affordability crisis many households face, with growth of housing costs outpacing income growth for many. As we see the forward pipeline of residential rental construction decelerating, demand-supply dynamics are likely to maintain affordability challenges in the short- and medium-term.

Not Just a Renter Issue: Cost-Burdened Households Among Homeowners and Higher Income Groups

The rising cost of housing is becoming more widespread, impacting not only many renter households but also increasingly affecting homeowners, particularly those with higher incomes. Approximately 18.8 million homeowners (nearly a quarter of all homeowners) are cost burdened, spending more than 30% of their income on homeownership housing costs, according to the latest data. Particularly concerning is the rise in cosft-burdened households with higher incomes as the number of cost-burdened homeowners earning $75,000 rose by 16.6% year-over-year, thus gaining a larger share of total cost-burdened homeowner households.

Rising Affordability Challenges amid Increasingly Higher Incomes

Rising affordability challenges for renters are equally if not more concern, especially given the lack of housing alternatives. In 2023, the number of renter households increased by 424,000 (up 0.9%). A meaningful portion of these households are either cost-burdened or severely cost-burdened when considering their incomes and housing costs. In the same period, the number of cost-burdened renters grew by 226,000, equal to 53% of overall renter household growth, and nearly one-quarter of all renter households are now considered severely cost-burdened. The affordability issue many households face is underscored by the 39.1% cumulative growth in median monthly housing costs since 2010. Much of the cumulative growth is recent, as this metric increased 7% year-over-year in 2023, a significant rise considering that housing costs grew modestly for nearly a decade following the GFC, ranging between -0.8% - 3.2% annually from 2011 to 2019.

What is notable is the significant rise in the renter population within higher income brackets, which is a trend that we have been following for several years. In 2023, the number of individuals earning between $100,000 and $150,000 who chose to rent grew by 9.0% year-over-year, while those earning over $150,000 saw an 11.8% increase. Since 2019 and prior to the pandemic, these same income groups have experienced renter population growth of 35.9% and 58.8%, respectively (see accompanying visual). We see this as having two primary effects: deeper pools of rental demand and a broader range of renter preferences for amenities. Both are likely to affect change in the residential rental market in this next cycle.

As Renter Incomes Increase, So Does the Median Age

Another major factor for the residential rental sector is the growth of older renter cohorts (ages 55-84), which has increased meaningfully since 2010. In many age groups, renter households have experienced stronger cumulative growth than owner households over the past several years, potentially driven by similar factors influencing higher-income individuals who opt to rent. However, for older renter households this has been especially strong, increasing by 42.0% since 2010, compared to 7.4% among renters aged 15-54. This substantial increase has placed upward pressure on demand for rental properties and is a trend that reflects shifting preferences among older adults who are increasingly opting for the flexibility and reduced maintenance that renting offers.

We see several factors shaping the residential rental sector in the next cycle, chief among them are affordability and a wider range of preferences and needs based not only on income but also by age demographics.