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How Americans View the Economy Depends on Whether They Rent or Own
How is the economy? Your answer may depend on whether you own your home.
The latest data shows that renters are struggling more financially, while homeowners continue to reap the rewards of refinancing during the pandemic when mortgage rates were at historic lows.
The growing divide has complicated the Fed’s efforts to reduce inflation, with homeowners propping up consumer prices with their discretionary purchasing power.
“The post-pandemic economy is treating people very differently, creating a headache for central bankers,” wrote Jeffrey Roach, chief economist at LPL Financial, in a research note this week. “Extreme differences can often be attributed to housing situations, as renters have a very different experience than homeowners.”
A “For Rent” sign outside an apartment building in Sacramento, California, in 2017. (ASSOCIATED PRESS) (ASSOCIATED PRESS)
‘Unbearable for renters’
Since the start of the pandemic, rents have increased more than 20%, Roach noted, with renters paying on average about $370 more per month.
“A difficult housing market for people across the country has, in many cases, become almost unbearable for renters across the country,” Shamus Roller, executive director of the National Housing Law Project, told Yahoo Finance.
How unbearable? Nearly 1 in 5 renters (19%) reported late rent at some point in the past year, a Federal Reserve report this week found, up from 17% in 2022.
They were also more likely to report not having paid all their bills in the previous month than homeowners, even when controlling for income. For each type of bill – water, gas or electricity or telephone, internet or cable bill – renters had higher rates of non-payment.
“Even if they don’t struggle to pay rent, rent takes up a large portion of their income because they have very little left over for other things in life and that creates anxiety,” Roller said.
“They feel a level of economic insecurity…in the midst of an economy that is doing very well.”
A man reviews property listings and homes for sale in Florida. (Jeffrey Greenberg/Universal Images Group via Getty Images) (Jeff Greenberg via Getty Images)
‘If you own a house, you feel better’
The owners’ fortunes look very different.
About a third of homeowners had a mortgage refinanced in 2020 or 2021, when mortgage rates hovered around 3% or less, Roach wrote. As a result, they saved an average of approximately $220 per month, with mortgage payments taking up an almost historically low portion of their disposable income.
And unlike renters, mortgage payments are a “fairly predictable cost” in the future, Roller noted, making it easier to budget for future expenses.
“I think if you own a house, you feel better about it,” Roller said.
The story continues
At the same time, home prices have only risen since the pandemic, creating a record level of home value that homeowners can take advantage of through refinancing or home equity loans and lines of credit.
That extra money “increased the spending splurge,” Roach wrote, “and created a headache for policymakers dealing with an economy less sensitive to interest rate policy.”
Owners are more likely to own shares than renters, so they have also benefited from the considerable gains in the stock market over the last year and a half.
Admittedly, homeowners have had to absorb higher home insurance costs.
And those who bought in the last two years, when mortgage rates doubled during the Fed’s inflation-fighting campaign, are shelling out an average of $2,100 a month on their mortgage payments, or $700 more than those who bought before the pandemic. , the Fed study concluded.
But more homeowners remain in a better financial position than before the pandemic, and that has “kept the economy out of crisis,” Roach wrote.
The question remains how long this will last.
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.