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The Worst Housing Crash Side Effect That’s Eroding Family Savings

A lot of fuss has been made about the housing market lately — and understandably so. Home values have plummeted, homebuilder earnings have evaporated, foreclosures remain high and mortgage lending remains stagnant.

America has endured a roughly 30% drop in housing values nationwide compared with 2006 valuations — give or take a bit depending on your particular home and particular market.

But there is an untold story of the housing crash that also has wiped away billions in wealth from American families and will continue to weigh on the economy going forward: the surge in rent costs.

“Unaffordable” Rentals Rise

The release of 2010 Census data released this week shows that more than half of Americans are paying over 30% of their household income on housing costs via costly rental agreements. The government uses that 30% mark to define whether housing is “affordable” or not for a given market. As of 2010, 53% of Americans were spending about a third or more of their total income on housing costs.

That’s disturbing enough, but worse is the news that this trend isn’t new. That 53% of families above the “affordable housing” threshold last year was up from 51.5% in 2009 and from about 50% in 2008.

That trend isn’t going to slow down, either. A USA TODAY report this week cites an economist at the real estate site as saying rents should go up another 4% nationwide this year. That’s because “strong demand is driving rents up as homeowners lose homes to foreclosure and become renters” and “skittish consumers are also delaying home purchases.”

Inflation Eroding Wages

So what’s behind the upward trend for rents in a down economy? Well, there are several reasons. First and foremost, the trend isn’t necessarily “up” for rents. According to the numbers, median rents nationwide remained stable at $855 per month last year.

The problem is inflation and stagnant wages. Median national household incomes fell 2.2% last year when you adjust for inflation — meaning there is just less money to go around for everything.

Don’t expect that trend to slow down, either. Consumer prices in the U.S. rose by 0.4% from July to August, bringing the annual measure of inflation to 3.8% — the highest since September 2008.

Lack of Rental Supply

Making matters worse is that many real estate markets had long ago abandoned the construction of rental units. The culprit here is the same twisted logic that led to the housing bubble — the theory that home values always will go up and that a family’s best investment is a new house as a result. Why bother building rentals where homes are where the money is?

After years with little or no rental growth, there now is a huge disparity between supply and demand. Take Fort Lauderdale, Fla. The region is a poster child for the condo bust turned apartment boom. Developers are set to kick off a new round of “housing” construction with plans to build more than 4,000 rental apartments.

It’s a bitter pill for some to swallow. Some Florida builders who made a mint selling cookie-cutter condos during the boom will now get paid again for building rentals, even as homeowners get burned twice on the condo crash and skyrocketing rents.

Sure, these builders are just making good business decisions. And lest you think they are villains, nearly 30% of all home sales at the midpoint of 2011 had been all-cash transactions — mostly to big rental firms snapping up properties. Without these rental businesses, just imagine how weak demand would be in the housing market right now!

But you can’t ignore the fact that many families have been hit twice — on the crash of home value and on costly rent now that they have left their house and moved to an apartment. Any way you slice it, this trend has erased a significant chunk of consumer spending power.

Possible Solutions

Building new rentals, as the Fort Lauderdale project shows, can be a good way to drive down rents in the long term. Not only will it increase supply, but it will provide good construction jobs in a sector that has been hit very hard by the downturn. However, you can’t erect a new apartment building overnight — and those solutions will take many years to have substantive impact.

The big-picture folks out there probably would argue that the easiest way out of this mess isn’t a housing-based solution at all. The quickest way to reduce the amount of people paying 30% or more of their income for housing is actually to boost income — not reduce rents. But again, that solution cannot be put into action overnight. And, to put it mildly, that is much easier said than done.

So are there any solutions other than driving down rents or driving up incomes that can have an immediate impact? Maybe.

At the beginning of August, the Obama administration floated a plan that just might be crazy enough to work — rent out some of the distressed homes that Fannie and Freddie now own after foreclosure. Some would be outright rentals, and others could even be lease-to-own opportunities. Sounds like a good idea, right?

The trouble, however, is we have proven that monkeying with housing market dynamics is a dangerous business.

The best thing that can happen to fix the rental market is to allow demand to outpace supply. Yes, it will cause rent to rise in the short term — but it might eventually create more incentives for folks with means to move out of an apartment and back into a house. It also might incite more investors to buy up foreclosed homes on the cheap to build out their rental portfolio and cash in on higher rents.

Yes, this “solution” of allowing the free market to run its course is painful for people who lose homes along the way to foreclosure, and for the families who struggle to make rent. It’s not pretty, and it’s certainly not a fast fix.

But it is an organic, free-market solution as we try to find a new way out of the housing bubble. And that seems the only prudent course right now.

Jeff Reeves is the editor of As of this writing, he did not own a position in any of the stocks named here. Write him at, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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