If the concept of rent being no more than 30% of your take-home (after tax) pay seems about as realistic as purple unicorns, you might be wondering why rent is so high anyway.
In 2015, 11.8 million U.S. households spent half or more of their income on rent, and this figure is projected to increase, according to the Enterprise Resource Center and the Harvard Joint Center for Housing Studies.
Many factors are responsible:
If you rent in a large metro area with heavy restrictions on new construction and with height restrictions on how tall buildings can be (hello San Francisco), you get scarcity conditions really fast. You have a situation where building isn't keeping up with demand. When that happens, people tend to move in and then, like in Hotel California, never leave. This drives up rents for available units.
People aren't buying
The percentage of homes sold to first-time homebuyers—traditionally the foundation of the housing market—is still down. And when people aren't buying, they're renting, keeping the availability of rentals scarce. In 2015, only 32% of homebuyers were first-time buyers
, compared with the historical average of 40%. Why the decline? Even though it might save people money to buy vs. rent, in a classic catch-22 situation, it's difficult for many first-time buyers to save up enough for a down payment when they're paying high rents. Debt also plays a factor, particularly student loan debt, which makes saving for a home difficult.
Low wages/high unemployment
In cities where wages are stagnant and jobs are scarce, people can't afford to buy a home or to stay in the home they bought during better times. This also leads to more demand for rental units, which—you guessed it—drives up the price.
Rent control/Rent stabilization
The people who are already in a rent-controlled or rent-stabilized dwellings don't ever ask why their rent is so high because their rent is being kept artificially low
, making rental units that aren't in these categories artificially high
. Take New York City
, for example, where about half the rental units are rent stabilized (47%) or rent controlled (1.2%). This leaves the open market with half as many rental units available as there would otherwise be. And scarcity leads to … higher rent.
Location, location, location is a cliché for a reason—it's true. If the area is attractive and provides great amenities, it's going to cost you to live there.
What to do
It's obviously not a great idea to have 40% or 50% (and yes, even 70% for some people) of your paycheck going to rent. You have little to no "fun" money, you likely don't have an emergency fund, and it will be nearly impossible to get out of the cycle.
Here are some considerations if paying less rent is your goal:
- Move from the "cool" area
- Get one or two roomies
- Compromise on "must-have" amenities
- Invest time to look for bargain apartments