Disposable Income Down, Rent Up; What This Means for the Housing Market

Disposable Income DownThere’s a major problem in the U.S. housing market; the disparity between rent and disposable income growth has widened drastically and is making it harder for renters to become homeowners.

Disposal Income Trend Negative in the Last Decade

Before going into details, let’s look at the chart below. It shows the percentage change in the real disposable personal income of Americans. Real disposable income is simply personal income minus taxes, adjusted for inflation.

Real Disposable Personal Income Chart

To say the very least, the trend is negative. In other words, while personal income has been growing, the percentage is decreasing. For example, between 2000 and 2006, the average increase in disposable income was 3.2%. This same figure between 2008 and 2014 was a mere 1.4%.

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U.S. Home Rentals vs. Disposable Income

It’s embedded in online budget calculators and federal policies that you should spend no more than 30% of your income on housing. There is only one problem: this number is far from being even remotely realistic. Income growth has been essentially flat over the past few years. At the same time, thanks to ultra-low interest rates, home prices have increased. Rental rates have also gone up. (Source: Bloomberg.com, last accessed, May 25, 2015.)

In 2014, the average household net-adjusted disposable income per capita was $41,355 a year.At the same time, the median asking rent for an unfinished apartment in the U.S. was $1,314 per month. (Sources: OECD.com, last accessed, May 25, 2015;Statista.com, last accessed, May 25, 2015.)

If we apply the 30% rule, then Americans should be paying about $1,034 per month. But they’re not. This means households are overpaying by $280.00 per month (or $3,360 annually) for rent. Mind you, there are other expenses that a household must pay for; notably food and gas, among many others.

With all this in mind, one question remains: What will this do to the housing market? It’s simple. If people are paying more for rent, and their earnings aren’t increasing, they can’t really save money for a down payment on a house. Even if they are able to save, it will take them much longer.

In addition to this, when Americans have less money in their pockets to spend on goods and services due to higher rent prices and stagnating disposal personal income, it can have an even broader impact. The U.S. economy will suffer, as consumer spending makes up on two-thirds of U.S. gross domestic product (GDP).