While many of us who grew up in the 1980s are familiar with the phrase trickle down effect, newer generations may not have the same cultural reference. In a nut shell, the idea is that when the wealthiest citizens benefit or see financial prosperity, they will spend more, which will benefit everyone further down the chain.
In the case of rising rental costs, however, the trickle down effect is having a negative impact for low income rental families. Especially in areas where rental demand has only increased, the impact has been even greater.
Take Manhattan as an example. Rents for apartments have continued to increase. Affordable housing is at a crisis point, as landlords find themselves in a position to convert low income housing into market rate housing. But Manhattan is not the only area of the country struggling with this issue. From the east to the west, affordable housing is disappearing.
Rental increases trickle down as well
Unfortunately, the resulting rental inflation has ate into any disposable income these families may have had available. American Housing Survey assembled data from 1989 to 2013 and found that of the 32 million new construction dwelling built, only 3.1 million were targeted for the lowest income households.
However, there were over 10 million units constructed that were for higher income households. As a result, the demand is not as great for these upper units, thus keeping the rental inflation in check. Demand at the lower end is much greater for a limited supply. Thus the inflation is significantly greater.
Still, for those who are living paycheck to paycheck and spending up to 50% of their income on rent, this is not news. For them, the question is how to get their housing costs under control. Unfortunately, it does not appear that the vacancies and high demand will balance themselves out very quickly. New construction is not able to keep up with the current demand, which is only expected to grow within the next decade.
This is playing out even more so in places that are in the middle of economic booms. Their housing costs can quickly outpace the other living costs, including food, miscellaneous debt and entertainment. Yet the U.S. economy depends on consumer spending to keep the economy moving forward. When the disposable income is shifted to cover housing costs, then the economy itself can reach a stalemate of sorts.
To truly see improvement in this situation, inventory must grow at a faster pace to meet demand. There is also a need to make mortgages possible for those who are in the middle of the credit road, so they can move out of the rental market. By creating additional home owners, the overall demand for rental housing will decrease, which can only help to stabilize the market. Yet the struggle continues for those who are looking to make the move to home ownership, but who are still working to improve or build their credit score.
Thus the trickle-down effect will continue to adversely affect those on the lower end of the income spectrum, at least when it comes to rental inflation.