When middle-class incomes collapse, how you gonna pay next month’s rent?

As the coronavirus forces businesses to lay off workers or reduce hours, millions of Americans are seeing their incomes plummet. One of the most pressing concerns (besides staying healthy) is whether these households will be able to pay next month’s rent. Being able to afford decent quality, stable housing in a safe neighborhood is an essential component of financial and personal security–especially during a public health crisis that requires people to shelter in place. The poorest 20 percent of U.S. households have for many years faced difficulty in paying the rent. But in recent years, rapidly rising housing costs are putting more pressure on many middle-class families’ monthly budgets – especially for those who rent their homes.

In this brief, I examine the relationship between rent and household income for several different slices of the middle class across the 100 largest metro areas. The analysis focuses on rental affordability rather than the price of owner-occupied housing, because the primary goal of policymakers should be ensuring that all households can afford decent quality shelter. Whether people choose to invest their savings in a potentially appreciating financial asset is a separate issue. Rental housing affordability is also more relevant for the well-being of moderate-income households.

The data in this analysis measures rents and incomes from 2013 to 2017, prior to the current crisis. It seems fair to assume that rental affordability will worsen over the upcoming months, so these results should be read as a “best case” scenario.

How much of your monthly paycheck goes to your landlord? Depends where you live.

In all the 100 largest metro areas, middle-income households – those earning the median income in their metropolitan area – could afford to rent the median rental home in their metro while spending less than 30 percent of their income on rent (a standard benchmark set by the U.S. Department of Housing & Urban Development). Households living in more expensive metros would have to spend a larger share of income to rent the typical home. For instance, in the Los Angeles metro, the median household would need to spend about 23% of monthly income to pay the $1200 monthly rent for a median home. In cheaper metros like Detroit, the median household would only need to spend about 15% of their income to cover the $750 median rent.

(It’s important to keep in mind that the size and quality of housing a given level of rent will buy varies quite a lot across geographic areas: $1200 a month in Dallas is enough for a two-bedroom, two-bath apartment, but barely a studio in Brooklyn. Similarly, middle-income households in expensive metros are likely to live farther from job centers and spend more time commuting.) 

Figure 1:

There are some distinct geographic patterns in rental affordability. Two-thirds of the most expensive metros – those with median rents above $1000 – are in the West. More than half of low-rent metros (median rent below $700) are in the South, with the remainder mostly in the Midwest. Metros in the Northeast show the greatest dispersion in median rents, from around $600 in Pittsburgh and Buffalo to $1200 or more in Boston and New York.

Comparing median income for all households to median rent is a somewhat misleading measure of true affordability: more than half of U.S. households own their homes, and so are not competing for homes in the rental market. Because homeowners on average earn higher incomes than renters, using median income for all households overstates the purchasing power of typical households looking for rental homes. The U.S. median household income is $58,000, but the median income for renter households is $37,000, or roughly 65% of the overall median. Although the gap between owner and renter incomes varies across metro areas, we can use the national benchmark to approximate purchasing power for “typical” renter households.

The estimated affordability of median rent to typical renter households (those earning 65% of the median income in their metro area) shows quite a different picture. In 14 of the 100 largest metros, a typical renter household would need to spend more than 30% of income to rent the typical home. Miami is the least affordable, requiring almost 40% of a typical renter’s income, closely followed by Los Angeles and San Diego. Even in cheaper metros like Detroit and Dallas, median rent would consume about 25% of renters’ income. Several of the metros with the highest rent levels have relatively low rent-income ratios because incomes are quite high: examples include Boston, Bridgeport-Stamford CT, and Washington DC.

Figure 2:

Mind the racial housing affordability gaps

The U.S. has persistent income differences across racial groups, which translate into disparate abilities to afford housing (Figure 3). Pooling all metro areas, black household incomes are $25,000 less than white household incomes. Hispanic household incomes are $23,000 less than those of non-Hispanic white households. These income differences mean that, in metros where the typical white household could easily afford rent on the typical home, typical black and Hispanic families will have a more limited set of homes – and neighborhoods – that fit their budgets.

Figure 3:

Another way to illustrate the difference in purchasing power by race is to compare what share of income the median Black household would have to spend to rent the median home in a metro area, relative to income share for median white households to rent the same home (Figure 4). The vertical axis shows the ratio of median rent to Black household income, the horizontal axis shows the ratio of median rent to white household income. The diagonal line illustrates where rent-income ratios would fall if they were equal for Black and white households. All but two metros lie above that line. The exceptions — McAllen and El Paso – are metros where the white population is largely Hispanic.

Median rent is greater than 25% of income for typical Black households in 48 of the 100 metro areas, and greater than 30% of income in 14 metros. In none of the 100 largest metros would a typical white household have to spend more than 25% of income on rent. San Francisco and Minneapolis have the largest black-white affordability gaps: median rent-income ratios for typical Black households are more than double ratios for typical white households.

Figure 4:

In all 100 metro areas, typical Hispanic households face higher rent-income ratios than non-Hispanic white households: all metros lie above the 45-degree line in Figure 5. In 22 of these metros, rent-income ratios are greater than 0.25 for typical Hispanic households, and in 5 metros rent-income ratios for Hispanics are greater than 0.3. The metros with the highest affordability gaps between Hispanics and non-Hispanic whites are all located in the Northeast, led by Springfield MA and Boston. The metros with the smallest affordability gaps – Akron OH and Spokane WA – have among the lowest incomes for non-Hispanic whites.

Figure 5:

Could racial affordability gaps perpetuate racial segregation?

During the booming economy of the past several years, typical renter households in most metro areas were able to afford the rent without stretching their budgets – unlike low-income households, for whom monthly housing costs are a severe financial strain. But as unemployment spikes and incomes plummet during the coronavirus pandemic, households across the country will struggle to pay for housing, groceries, and other basic necessities. Most renter households do not have enough savings to weather several months of unemployment – and unlike homeowners, they cannot tap into home equity to tide them over.

The stark racial affordability gaps that exist even in strong economic times raise economic and political challenges for policymakers. Because Black and Latino households have less income to spend on housing, they must choose among a smaller set of homes – and are less able to compete for housing in desirable locations. Where families live impacts their access to economic opportunity – in particular, whether families with children can afford housing in safe neighborhoods with high quality schools has long run consequences. My forthcoming research, a companion piece to this one, shows that nearly all metro areas experience a high degree of income sorting across their jurisdictions: even relatively affordable metros like Dallas and Detroit have exclusive, expensive—and virtually all white—suburbs that are effectively out of reach for most middle-income households.

The fastest, most direct way to help U.S. households continue to pay the rent or mortgage in the current crisis is for the federal government to send people checks. In the longer term, two improvements in housing policy would help ensure that households of all races and all income levels can access high opportunity neighborhoods. First, local governments should reform land use regulations to allow smaller, lower-cost housing in all residential areas. Second, governments should rigorously enforce existing fair housing laws that prohibit discrimination. Beyond housing policy changes, helping Black and Hispanic workers achieve higher-paying jobs is essential to reducing racial disparities.

Thanks to Sarah Crump and Alex Din for excellent research assistance.