It’s a bird! It’s a plane! No, it’s just the high cost of your rent going up.

The typical U.S. renter is expected to be cost burdened by the end of 2021, according to a recent Zillow analysis.

Cost burdened is defined as the need to spend more than 30% of monthly income on rent. Nationally, the average renter has been below this threshold since late-2018, when rent growth began to slow considerably. However, rents have begun to jump since Q1 2021, quickly outpacing renter incomes.

Here in California, renters have continued to remain cost burdened, even despite the fallback in rents in 2018. The average share of income spent by a typical renter in June 2021 is:

  • 33% in Los Angeles, roughly level with a year earlier;
  • 33% in Sacramento, up from 32% a year earlier;
  • 34% in Riverside, up from 32% a year earlier; and
  • 36% in San Diego, up from 35% a year earlier.

As is typical for the Bay Area, San Francisco and San Jose buck this trend, with just 28% of renters considered cost burdened in June 2021, down from 29% a year earlier. The high-paying tech industry has simultaneously inflated incomes for white collar workers, while the high cost of housing has ensured lower-income workers are pushed out to less costly suburbs. The result has been an overall increase in income for the area.

Further, while rents have been rising faster than incomes across most of the state, it’s also becoming more difficult to qualify to buy a home. This is because home prices have increased so quickly — the statewide average home price was 23% above a year earlier as of June 2021. Despite low interest rates, Zillow’s mortgage cost metric is now at its highest level since they began recording data in 2014.

But, as any seasoned real estate professional worth their salt knows, what goes up…

Rents and home prices will fall

It’s axiomatic: absent outside forces like government stimulus or bad loans, home prices and rents will not rise beyond the ability of end users to pay.

In 2020-2021, historically low interest rates have provided a boost for buyer purchasing power, allowing homebuyers to qualify for higher home prices with the same incomes. These low interest rates, along with competition and fear-of-missing out (FOMO) on a dwindling inventory, served to inflate home prices and sales volume in 2020. To make matters worse, this pattern is gaining magnitudes of speed in 2021.

However, 2021’s high home prices are expected to reverse course in 2022, the result of long-term job losses and high levels of 90+ day mortgage delinquencies. As of Q2 2021, 5.47% of residential mortgages were delinquent, according to the Mortgage Bankers Association (MBA). Prior to the 2020 recession, this share was just below 4.0%.

While 1.6 million homeowners are protected under forbearance programs as of August 2021, time is running out for these homeowners to regain their incomes and become current.

With the expiration of the federal foreclosure moratorium now passed, expect to see forced sales return, inflating inventory and increasing days-on-market. Soon enough, this will lead to price cuts and reduced home values.

On the side of renters, the eviction moratorium is scheduled to lapse here in California at the end of September 2021. When this occurs, rental vacancies will rise and the rapid rent growth of 2021 will subside.

The only factor with the power to shift this narrative will be the return of jobs.

California is still 1.3 million jobs below the pre-recession peak as of July 2021. Each of these jobs lost represents a household’s income diminished, or completely evaporated. Thus far, these tenants and homeowners have been protected from losing their homes. But as government interventions dwindle, the impacts of these lost jobs will finally begin to ripple across the housing market.

For the next housing recovery when renters and homebuyers are no longer cost burdened, look first to a jobs recovery. firsttuesday anticipates this to arrive organically, around 2024-2025, or sooner with any additional government intervention.

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The 2020 recession was the shortest ever — but its effects continue in the housing market