A few weeks back I wrote that the collapse of the U.S. economy is destroying the incomes of potential tenants, wreaking havoc in rental markets. I pointed out that although U.S. household incomes are dropping in real terms, rents in the U.S. are rising rapidly. The result is that “the share of renters paying more than 30% of their income on rent — defined as ‘cost burdened’ — is at near-record highs. In 2013, almost half of all U.S. renters fell into that category.”
Last week, a new report revealed that, for renters, the U.S. economy is becoming much worse: “The cost of renting a home in the U.S. has risen to its least affordable levels ever, taking up a record proportion of income in most major cities.” People are spending so much of their monthly incomes on rent — up to 50% in places like San Francisco and Los Angeles — that they have essentially no money for discretionary spending.
If you own your own home, you may not be too concerned about this … but you should be.
Looking for Answers in All the Wrong Places
The cost of renting a home is rising faster than wages in many parts of the country, putting a tight squeeze on household budgets. Rental affordability has worsened year-over-year in 28 of the 35 largest metro areas. As a proportion of their monthly income, U.S. renters are now paying about double what homeowners do for housing. On the East Coast, in the Rockies, in South Florida and in the Northeast, many households are spending almost all of their income on housing and related costs, leaving nothing to spend on consumer goods and services … or on savings for things like a house, education or retirement.
The mainstream media tends to present this as a simple matter of supply and demand. Household income levels are flat, reflecting a weak job market. The supply of middle-class housing is stagnant in many cities because so many households remain “underwater” on their mortgages and can’t sell, and because builders are concentrating on the high-income market. Demand is constrained because tightened credit terms prevent many middle-class homebuyers from getting mortgages — and because households burdened by high rents can’t accumulate down payments. That in turn pushes many households into the crowded rental market, driving up rents.
Look to the Land
But there are other, less visible factors at work. Above all, the construction cost of new multi-family housing — the bedrock of the rental market — is being driven sky-high by land prices. In many desirable U.S. cities, a shortage of land suitable for affordable rental housing is the single biggest factor behind the lack of rental supply. Developers have no realistic choice but to concentrate on the top end of the rental market in order to recoup high land costs. That leaves middle-class folks competing for a dwindling supply, driving up rents.
High urban land prices are due to a combination of factors: The impact of historical land-use decisions, regulations limiting building heights and population density, and abuse of local planning systems by established homeowners, all play a role. The Economist recently estimated that eliminating regulatory burdens in U.S. cities could raise GDP by $1 to $2 trillion. Yes, trillion.
But high land prices also reflect the massive influx of foreign money aimed at U.S. real estate, especially from new “powerhouse” economies like China and Brazil. Fearing political or economic instability (or both), tycoons who have recently made it big in those places are rushing to buy property in the U.S. — and not just because we make nice neighbors. The fact is that the U.S. is the single largest tax haven on the planet, offering foreigners opportunities to hide wealth in real estate that are completely denied to U.S. citizens. That has made the U.S. the most desirable place in the world to hedge one’s bets via real estate investment.
The result is almost beyond comprehension: A square mile of Manhattan residential property now costs $16.5 billion. The total value of all the residential property in Kentucky ($300 billion) falls just short of the value of all the housing property in Queens ($317 billion).
There are other hidden costs to explosive U.S. land prices. The dearth of affordable rental options in the fastest-growing urban regions costs the U.S. economy about $1.6 trillion a year in lost wages and productivity. High housing costs mean workers can’t move to places like San Francisco or Denver in search of better paying jobs, so workers who are already there are able to bid up wages. Those higher wages, in turn, are simply passed on to landlords via higher rents.
Escape From the U.S. Economy
The biggest impact of America’s distorted property markets is that money that would have gone into the U.S. economy ends up in the already-bloated portfolios of property owners … just like in feudal Europe. The U.S. economy is weighed down by the amount of productivity that ends up going to rents, instead of goods and services.
This is precisely why Jeff Opdyke and I focus on opportunities outside the U.S., for bothinvestment and residence — and why you should as well. After all, feudalism wasn’t a dynamic system in the Middle Ages … and it’s not going to be one in the U.S. economy today, either.
Offshore and Asset Protection Editor