Recently-published data has shown that surging rent is taking a larger and larger chunk of Americans’ paychecks. That, in turn, is reducing the amount of money that Americans spend on other goods and services, dampening consumer spending and impacting the economy. Unless the trend can be reversed and rents drop to more normal levels, rising costs could put severe strains on the health of the economy.
Monetary Policy and Housing Prices
One of the major factors behind the surge in rental prices is the Federal Reserve’s loose monetary policy in the aftermath of the financial crisis. The Fed sought to keep house prices high since houses constituted the major part of household assets in the United States. However, by keeping housing prices high that kept many families and young people from being able to purchase a home. They had no choice but to rent.
Many other families who were hurt by the crash and who found their mortgages underwater walked away from their mortgages or declared bankruptcy. Since they could no longer afford to purchase a home, they were now forced to rent too.
And because of all the trillions of dollars of money pushed into the financial system by the Federal Reserve, financial institutions began to buy up houses and apartment buildings with the intention of taking in rental income from those properties. That perfect storm of factors has combined to send rents soaring.
Because rent increases are accelerating, they are taking a larger and larger portion of people’s paychecks. The Fed either doesn’t realize that by keeping housing costs inflated it is cutting down on the amount of money that consumers can spend on other goods and services, or it is trying to push people to take on increasing levels of debt in order to live their lives. Neither one of those scenarios is good for the economy’s long-term health and growth.
Higher Rents Negatively Affect Retirement
The increase in rents is hurting young people, taking an ever-larger portion of their paychecks and cutting into the amount of money they can save towards retirement. It will also end up hurting retirees, especially those who are either renting houses or apartments or who are looking to downsize from a large house.
One of the key things to remember in retirement is that your cost of living will increase every year. Health care prices will go up as a result of aging, but they are also increasing far faster than they should be. Food prices will continue increasing as the Federal Reserve continues to pursue inflationary monetary policy, shooting for an overall price level increase of 2 percent.
As real estate values continue to increase, property tax assessments continue to increase too. Retired homeowners will see those increases taking a bigger portion of their retirement income every year, while retired apartment dwellers will see those increases passed along by landlord through higher rents.
People don’t have infinite amounts of money they can spend on necessities, and many aren’t in solid enough financial condition to be able to pay these huge rent increases. If the Fed continues on its current course and attempts to continue its policies that push up asset prices, expect the cost of rental housing to continue increasing, and make sure you budget those increases when planning for your retirement.