Why the Income Gap Among Buyers, Homeowners, and Renters is Widening
The median cost of keeping a roof over one’s head has been slowly coming down in recent years for homeowners, however, is still rising for renters; creating and widening an affordability gap between those who own their homes and those that don’t. To become a homeowner in today’s market, buyers need to earn significantly more money than households that already own their home.
The income gap between buyers and homeowners fluctuates in a cyclical pattern. The most current one developed after the housing market bottomed out in 2012. Prior to that, the median household income for homeowners and buyers were about the same. In 2017, the median household income in the US was $79,900 for buyer households, versus $38,300 for renter households, creating an income gap where previously there was relative parity.
Much of this inequality is largely caused by the significant, upfront costs of buying a home, including the down payment and closing costs. Almost half of the renters who moved in the past year, about 46 percent, considered buying a home, but ultimately continued renting. A third of renters, 32 percent, will ultimately continue renting because of saving for a down payment. Higher-income households are more likely to afford these costs, so they are more likely to purchase a home and exit the population of renters.
The income disparity is also due to how the demographic mix has changed; more people, especially women, are living alone. Homebuyers are more likely to be married than renters, and therefore more likely to have two incomes. Dual-income households ultimately have a better ability to save a down payment, which translates to more purchasing power.
Traditionally, young married couples provide the thrust for growth in homeownership. Fewer young couples today have the necessary income to purchase their first home. A lag in income growth and the high-interest rates have priced young people out of the housing market.
Minorities and younger Americans, many of which have the burden of student debt, are especially at risk of being locked out of homeownership.
The past decade has been a rollercoaster of boom, bust, and recovery for the housing market. During the boom, lower-income home buyers are eager to realize the benefits of homeownership, and were often able to get easy credit designed to enable them to afford entry-level homes whose value quickly grew, and accounted for a majority, if not all their wealth. Many Americans with fewer assets and lower incomes invested whatever liquid wealth they did have into down payments on a home.
This flood of new buyers helped push the national homeownership rate from about 65 percent in the mid-1990s to almost 70 percent in 2006. However, when the bubble popped, the homes that were affordable for these buyers were significantly more likely to be foreclosed on than higher-end homes.
Adding insult to injury, after losing their home to foreclosure, they were forced to re-enter the housing market as renters. This demand for rental housing caused rents to skyrocket. Homeowners that went through foreclosure were now putting a larger portion of their income towards rent every month. This wasn’t helping them accumulate wealth. During the recovery, those foreclosed homes grew in value again at a rate roughly 1.6 times faster than the average U.S. home.
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