Are Renters Paying a 'Penalty' in Major U.S. Cities?

Life in up-and-coming cities like Raleigh, Jacksonville and Memphis might not be quite as inexpensive as you’ve heard. At least not if you are a renter.

Recently, Credit.com examined markets in America with the highest (and lowest) rates of housing-poor residents. Generally, analysts describe residents as housing poor if they spend more than 30% of their income on housing. We generated top 10 and bottom 10 city lists of housing-poor residents using data from the U.S. Census Bureau via the Berkeley Terner Center for Housing Innovation. Cities at the top of the list — where the most residents are housing poor — were no surprise: Los Angeles, New York, Miami. Cities in the bottom of the list were a bit predictable, too. That included Raleigh, N.C.; Columbus, Ohio; and Buffalo, N.Y. This is a familiar story: America’s “second-tier” cities are where the affordable housing is.

Scratch the surface, however, and things aren’t quite so clear.

The census data also includes information on how many renters vs. homeowners are housing poor. When you isolate renters, you find that many of these affordable cities aren’t that affordable. If half a city’s renters are housing poor, it’s hard to call that place inexpensive.

In every city studied, renters were more likely than homeowners to be housing poor. That makes sense. A certain portion of homeowners have paid off their mortgages. People who are deep into mortgage terms, thanks to inflation, see their payments essentially go down over time and are far less likely to spend a big chunk of their paycheck on housing.

But the discrepancy between housing-poor renters and buyers makes for interesting reading. In some places, renters are more than twice as likely to be housing poor; in other places, the rate is far lower. We’re calling this gap between housing-poor renters and owners the “rental penalty.” If you live in places with a big rental penalty, odds that your financial life is under serious stress are far higher when renting.

When we ranked cities this way, there were several surprises. Rochester, N.Y., had the highest rental penalty. There, only 22% of owners are housing poor, while 54% of renters are. Also in the top five are Jacksonville, Fla., and Raleigh — both considered inexpensive escapes for big-expensive-city dwellers. In Raleigh, 19.8% of owners are housing poor, but 48.1% of renters are.

Pittsburgh appears to be the most affordable place to live in the simple list from the other day, and it survives this rental penalty analysis, landing roughly in the middle of the pack. So do Columbus, Oklahoma City and Louisville. But Buffalo and Memphis, Tenn., don’t. There, renters are more than twice as likely to be housing poor.

What’s Causing the Penalty?

Generalizations about any housing market are fraught with peril, as all housing is intensely local, so it’s important to note that the “rental penalty” which shows up in the data could be caused by many factors.

“I suspect there are multiple reasons for why the difference in being ‘cost-burdened’ between renters and owners would be higher in some local markets,” said Jed Kolko, who called attention to the data in his report on highlights from the recently-released 2014 Census data for the Berkeley Terner Center. “One reason is that markets with long-term residents would have fewer cost-burdened households because they bought their home long ago and might not have [a] mortgage any longer. Another is that in markets where housing generally is very expensive, renting is more common for middle- and higher-income households, who may look less different than owners relative to other cities.”

On the other hand, some cities that showed up as expensive for renters didn’t surprise Daren Blomquist, vice president of RealtyTrac. In those markets, investors are scooping up homes and renting them, he said, putting price pressure on both first-time homebuyers and renters alike.

“Raleigh and Jacksonville stand out as hot spots for investors,” he said. “These are markets that on face value are fairly affordable, but you have these situations where institutional investors are creating more demand … they are willing and able to pay more than first-time homebuyers, who are not able to compete, so they stay as renters. Then rental costs go up.”

In a normal market, as rental prices rise, more people would make the leap to owning, putting the markets back into balance. But that’s not happening in some areas because outside investors are altering that delicate balance.

What Can Consumers Do?

The rental penalty data suggests two lessons for consumers. First, moving to Buffalo or Raleigh is not cheap for everyone. A New York City dweller trading apartment rent for a mortgage payment will probably feel like either place is Shangri-La, but someone who moves there to rent might end up feeling just as housing poor as they did in the big city they left.

Second, if you are already renting in a market with a big rental penalty, it’s probably a good idea to redouble your efforts to buy. (You may want to check your credit before you apply for a mortgage, though, since a good credit score will qualify you for better terms and conditions. You can get your free credit report summary on Credit.com to see where your credit stands.) For example: Blomquist and RealtyTrac regularly generate “rent vs. buy” data, and in Jacksonville, residents spend 36% of their income on rent, while a new home can be purchased with a mortgage payment that is only 21% of income.

“There may be some hesitancy on the part of a person moving there. They don’t know for sure it’s a long-term move,” he said. But the combination of relatively high rental prices and a strong job market can make such markets a smart buy. “Even if they are only going to be there for five years.”

The Cities With the Highest ‘Rental Penalty’

10. Orlando-Kissimmee-Sanford, Fla.
Percent of households spending more than 30% of income on housing (owners only): 29.5%
Percent of households spending more than 30% of income on housing (renters only): 56.3%
Rental Penalty: 26.8%

8. Detroit-Warren-Dearborn, Mich.
Percent of households spending more than 30% of income on housing (owners only): 23.5%
Percent of households spending more than 30% of income on housing (renters only): 51.0%
Rental Penalty: 27.5%

8. Cleveland-Elyria, Ohio
Percent of households spending more than 30% of income on housing (owners only): 22.7%
Percent of households spending more than 30% of income on housing (renters only): 50.2%
Rental Penalty: 27.5%

7. Buffalo-Cheektowaga-Niagara Falls, N.Y.
Percent of households spending more than 30% of income on housing (owners only): 21.3%
Percent of households spending more than 30% of income on housing (renters only): 48.9%
Rental Penalty: 27.6%

6. Memphis, Tenn.
Percent of households spending more than 30% of income on housing (owners only): 26.8%
Percent of households spending more than 30% of income on housing (renters only): 54.5%
Rental Penalty: 27.7%

5. New Orleans-Metairie, La.
Percent of households spending more than 30% of income on housing (owners only): 26.2%
Percent of households spending more than 30% of income on housing (renters only): 54.0%
Rental Penalty: 27.8%

4. Raleigh, N.C,
Percent of households spending more than 30% of income on housing (owners only): 19.8%
Percent of households spending more than 30% of income on housing (renters only): 48.1%
Rental Penalty: 28.3%

3. Jacksonville, Fla.
Percent of households spending more than 30% of income on housing (owners only): 26.1%
Percent of households spending more than 30% of income on housing (renters only): 55.0%
Rental Penalty: 28.9%

2. Indianapolis-Carmel-Anderson, Ind.
Percent of households spending more than 30% of income on housing (owners only): 20.1%
Percent of households spending more than 30% of income on housing (renters only): 50.8%
Rental Penalty: 30.7%

1. Rochester, N.Y.
Percent of households spending more than 30% of income on housing (owners only): 22.3%
Percent of households spending more than 30% of income on housing (renters only): 54.4%
Rental Penalty: 32.1%