The demographic shift behind the high-rent phenomenon
Renters have long struggled with soaring rents in some of the top housing markets in the US. In San Francisco, it’s called the “Housing Crisis” because middle-class households, such as teachers, can no longer afford to rent – with the median one-bedroom apartment going for $40,000 a year and a two-bedroom for $56,000.
Similar but less crass scenarios are playing out in New York, Boston, and other top rental markets. But who is renting these high-dollar apartments? Isn’t renting supposed to be for folks at the lower end of the income spectrum, with higher-income folks buying houses and condos?
Not anymore. Homeownership rates in the US have dropped to multi-decade lows. As always, the millennials are getting blamed. Whatever the reasons and culprits, there’s a shift underway. An analysis by RentCafé of the Census Bureau’s 2015 American Community Survey shed some light on just how significant these shifts are.
Turns out more and more high-income households are choosing to rent, rather than buy. The number of households earning more than $150K a year that are renting has soared by 217% over the past decade, from 551,000 in 2005 to 1.75 million in 2015.
Over the same period, the number of high-income homeowner households has risen by only 82%.
Cities see an increase in renter households with incomes over $150,000 in two ways:
- A household that made a little under $150K one year and now earns a little more, enough to get pushed over the $150K line.
- An influx of high-income households, attracted by industries that pay well, such as oil & gas when it was booming, or tech, etc. Many of these households might have made less than $150K before they moved to the new city for their new jobs.
This trend has been particularly strong since the Financial Crisis. In 2010, the number of high-income renters rose by 7%. In 2011, it jumped by 16%. It has risen since then every year in the double digits. In 2015, it increased by 12%.
Here are the changes in 2015 of the number of renter households by income category. Note the only category of renter households that actually declined:
- Over $150K: ↑ 12%
- $100K – $150K: ↑ 9%
- $75K – $100K: ↑ 7%
- $50K-$75K: ↑ 4%
- Less than $50K: ↓ 2%
But overall in the US, more than a third of households rent their homes, and the majority of them make less than $50K a year, according RentCafé, so below the median household income of $56K. This fits into the theme that renters earn less than homeowners.
But in big cities, the dynamics are changing for high-income renters:
“It shifts the focus on those who choose the urban high-rise living over owning a suburban home,” the report says. “Thus, we are more likely to see the affluent renters clustered in America’s largest urban areas, as Census data confirms. Here’s where the most renter households earning $150,000 or more live”:
- New York City: 212,000
- San Francisco: 57,000
- Los Angeles 51,000
- Chicago: 33,000
- San Diego: 21,000
- San Jose: 21,000
- Washington DC: 19,000
- Seattle: 16,000
- Boston: 17,000
San Francisco is in second place, though its population of 864,000 is relatively small compared to some of the mega cities on this list. There are about 382,000 households in the City. So the 57,000 high-income renter households account for about 15% of all households (including homeowner households) and for 25% of renter households – which gives San Francisco “the largest share of rich renters in the country.”
The analysis explains the phenomenon this way: “San Francisco is officially a City for Rich Renters.” Our local term for it is “Housing Crisis.”
The number of high-income renters has been soaring – by 35% just last year – as highly paid workers were brought into the city, and as households already in the city but making less than $150K in 2014 got raised above the line in 2015.
At the same time, the number of households making less than $150K decreased. Some escaped – Oakland and other East Bay cities have become favorite destinations for high-rent refugees. Others got a raise and got nudged into the category of the lucky ones.
And so last year, something unique happened: the number of high-income renter households (56,591) surpassed the number of high-income homeowner households (54,445).
What San Francisco has going for it is a solid job market, with high-paying IT and finance jobs occupied by young highly-skilled professionals — a recipe for the typical profile of an affluent renter.
While San Francisco is at the bleeding edge of this shift to high-income renting, other cities too experience these shifts. For example, in Fort Worth, where homeownership dominates for high-income households, the number of high-income renters too is surging: From 2014 to 2015, it jumped by 77% to 4,858. This is still a small number for a city that is similar in size to San Francisco, but it is part of the national trend.
In Portland, the number of high-income renters jumped by 71% over the same period, “thanks to an influx of millennials attracted to its booming tech sector and strong overall employment in various fields.”
In Memphis, the number of high-income renters jumped by 51%, in Phoenix by 41%, in Chicago by 36%, in San Jose by 32%, in Austin by 31%, in Charlotte by 29%, in Detroit by 29%….
The attitude toward renting has been changing. The increased interest in renting among a population segment that is typically made up of homeowners comes in the wake of the housing crisis. For many it’s a matter of caution, a hindsight “lesson learned” behavior that keeps even people with high-paying jobs in the renting pool longer.
For some it’s a lifestyle choice, as renting is more popular thanks to the high-end apartment market phenomenon that’s been spreading all over the US in the last couple of years. Or maybe it means that an increasing number of people believe that homeownership is not the only way to have a fulfilled and successful life.
The interactive chart below shows the percentage of renting households by income category. For example, in San Francisco, 38.6% of the renter households earn less than $50,000 a year, but nearly 25% of the renter households earn over $150K (hover over the columns for the specific data):
This income distribution of San Francisco renters is the reason why these ludicrously expensive rental apartments aren’t all vacant. At least during boom times. And it also underlies the upheaval of the “Housing Crisis,” as people who are not among the lucky ones are getting knocked over by this wave of money.
But rents are now dropping sharply due to oversupply from a breath-taking high-rise construction boom that coincides with withering demand, not just in San Francisco, but also in New York, Boston, and other cities. Read… What the Heck is Going on with Rents?