Financial experts recommend households spend no more than 31% of their income on housing. But for many families — especially in high-cost California — this is impossible, as rents often rise more quickly than household incomes. Families who spend more than the recommended share of their income on housing are considered cost-burdened.
Nationally, the average rate of renter cost-burden is 49.5% as of 2017. Here in California, the rate is significantly higher, with 55.2% of all renters being cost-burdened, according to a recent report by Apartment List.
The report defines cost-burdened as the need for a household earning the average area income needing to spend more than 30% of its income to pay for their city’s median-priced rental.
Here in California, Riverside tops the list of the major metros with the highest percentage of cost-burdened renter households. Of Riverside’s renter population, a depressing 30% are severely cost-burdened, spending 50% or more of their income on rent. At the national level, Riverside is second only to Miami, Florida in terms of cost-burdened renters. Other California cities where rents have increased faster than incomes are also overly expensive for renters.
Of note, two Bay Area counties which are infamous for their high home prices and rents are at the bottom of this list, well below the U.S. average of 49.5%. That’s because, while Santa Clara County and San Francisco have extremely high rents, income growth in this region is much more closely aligned with rent growth than in other parts of California.
Calculus shifts towards renters in 2019
While over half of all California renters are cost-burdened as of 2017 (most likely continuing into 2018) the math is shifting in their favor, as even while rents are high, incomes are gradually catching up to rent increases. This is evidenced in the declining share of cost-burdened renters in California’s major metros, from the statewide average of 55.4% in 2016 to 55.2% in 2017.
For example, in Los Angeles, the renter cost-burden rate decreased from 58.3% in 2016 to 57.8% in 2017. Likewise, in San Francisco where the share of cost-burdened renters is one of the lowest in the state, this percentage also decreased from 38.3% in 2016 to 37.1% in 2017.
However, the same is not true for homebuyers, who have seen a steady increase in home prices relative to income increases. For instance, the average annual home price increase in 2017 was 8.6%, while average incomes only increased 4.0%, according to the Bureau of Economic Analysis. This has contributed to the state’s persistently low homeownership rate, as potential homebuyers simply cannot keep up with rising home prices. All of this has been made worse by rising mortgage interest rates in 2018, which decreased buyer purchasing power and only made it more expensive to purchase.
But there is some good news on the horizon for homebuyers: declining buyer purchasing power will cause prices to fall back in 2019, dropping and eventually rebounding to increase in-line with incomes.
Currently, in most cases, it makes more sense to rent than buy across California as we head into a period of dropping prices. But once prices bottom — expected around 2020-2021 — a buyer’s market will arrive, and the housing market will rebound.