Where and Why the Income Gap Among Buyers, Homeowners and Renters Is Widening

  • To become a homeowner today, buyers need to earn more money than households who already own their home.
  • The typical homebuyer’s household income grew by more than twice the rate of homeowners’ between 2012 and 2017. After eight years of relative parity, buyers in 2017 typically earn about $5,000 more a year than owners.
  • The typical buyer household earns twice as much (2.1 times) as the typical renter. In some metros, the gap is as high as 2.8 times.

To become a homeowner today, buyers need to earn more money than households that already own their home.

The typical home buyer in 2017 earned 6.5 percent more in household income than the typical homeowner — and more than two times the typical renter. Between 2012 and 2017, the median income for the typical home buying household grew at more than twice the rate of households that already owned a home, creating an income gap where previously there was relative parity.

In dollar terms, the gap in median household income between buyers and owners amounts to about $5,000 a year, although in some markets it’s more than twice that. In Dallas, for instance, the typical buyer household earned almost $12,000 more than the typical homeowner. Only five years earlier, the difference in incomes was $1,000, with homeowners earning more than buyers.

Still, in some markets, there is little if any income gap. And in others, such as Indianapolis, the typical buyer household actually earned slightly less than homeowners in 2017.

The income gap between buyers and homeowners is a relatively recent one that developed after the housing market bottomed out in 2012. In the seven years prior to that, median household incomes for homeowners and buyers were about the same.

The disparity underscores how much more expensive housing has become for buyers, and the difficulty faced by renters looking to become homeowners in high-demand markets. These renters are often competing against more affluent buyers in the hunt for a home.

Between 2012 and 2017, the typical homebuyer’s household income grew at more than twice the rate of the typical homeowner, increasing 18 percent to homeowners’ 8 percent.

The recovery was marked by limited housing inventory and historically low-interest rates, which had the effect of driving up demand for a shrinking pool of available homes, which in turn drove home prices up much faster than the pace of income growth.

The price of new construction also leaped during the recovery, creating a widening price gap between newly built and existing homes. At the beginning of the recession in 2008, the typical new construction home was priced at about 25 percent higher than the overall median sale price of all homes sold. By 2017, new construction prices were about 50 percent higher.[1]

Migration to metros with high-paying jobs likely contributed to the higher incomes of buyers in some metros – and likely to higher home prices, given these better-paid buyers’ ability/willingness to pay more for a relatively small number of homes for sale.

Unlike the gap between buyers and homeowners, the income disparity between buyers and renters has been relatively constant during that same period (2005-2017). What is surprising, though, is the size of the gap.

The typical home buyer earns twice as much (2.1 times) as the typical renter household. In some metros, the gap is almost triple.

In 2017, US median household income was $79,900 for buyer households versus $38,300 for renter households.

Much of this disparity is due to the large upfront costs of buying a home, including the down payment and closing costs. Almost half of the renters who moved in the past year (46 percent) considered buying a home instead of during their search, but ultimately continued renting.[2] And a third of renters (32 percent) said they will continue renting because they are saving for a down payment.[3]

Because higher-earning households are better able to afford these costs, they are more likely to purchase a home and exit the population of renters.

The income disparity also is due, in part, to the fact that buyers are more likely to be married than renters, and therefore more likely to have two incomes. These dual-income households have more capacity to save a down payment, and ultimately, more purchasing power.

A look at the top 35 metros shows that, even in metros with the smallest income gap between buyers and renters, the typical buyer still earns nearly twice that of the typical renter.

For instance, in Tampa — the metro with the lowest gap – median buyer household income was 1.7 times more than renters.

Cities with the largest disparities are Philadelphia (buyer incomes are 2.8 times larger than renter incomes), Boston (2.6 times), and New York (2.5 times).

2017 Median Household Incomes of Buyers and Renters

METRO BUYER INCOME RENTER INCOME RATIO
Philadelphia $98,000 $35,300 2.8
Boston $120,000 $46,600 2.6
New York $119,000 $47,800 2.5
San Antonio $88,000 $36,424 2.4
Cincinnati $81,488 $35,000 2.3
Cleveland $68,405 $30,000 2.3
Columbus $88,000 $39,000 2.3
Los Angeles $111,603 $49,530 2.3
Houston $92,815 $41,200 2.3
Detroit $75,986 $34,000 2.2
Dallas $100,042 $45,000 2.2
Chicago $88,404 $40,000 2.2
St Louis $77,188 $35,000 2.2
San Diego $116,756 $53,000 2.2
Portland $103,000 $47,000 2.2
Minneapolis $94,170 $43,000 2.2
Sacramento $96,244 $44,300 2.2
Baltimore $95,112 $44,000 2.2
San Jose $191,603 $89,000 2.2
Indianapolis $75,731 $35,200 2.2
San Francisco $155,000 $73,163 2.1
Kansas City $82,042 $39,000 2.1
United States $79,900 $38,300 2.1
Seattle $113,877 $55,000 2.1
Atlanta $88,706 $43,000 2.1
Pittsburgh $65,843 $32,000 2.1
Washington $130,000 $64,000 2.0
Phoenix $85,000 $42,000 2.0
Denver $100,288 $49,800 2.0
Las Vegas $82,243 $41,718 2.0
Austin $98,250 $50,000 2.0
Orlando $78,357 $40,000 2.0
Charlotte $75,000 $38,874 1.9
Riverside $80,000 $41,500 1.9
Miami $72,000 $39,000 1.8
Tampa $66,437 $38,000 1.7

The income gap between buyers and homeowners is likely to persist, but at a slower rate, thanks to a number of factors.

Home values are expected to increase, but at a slower pace than the past several years. Inventory is also slowly starting to increase from historic lows.[4] Those two trends suggest that buying a home will become more affordable, but there are other forces at work.

Mortgage rates rose 0.7 percent in 2018, and most experts predict additional increases.[5] Continued interest rate increases could sideline some potential buyers by pushing mortgage payments past the point of affordability.

For instance, if rates rise to 5.5 percent from their December 2018 levels, a typical household trying to hold their housing costs to 30 percent of their income would have $35,000 less to spend on a house.

And for those households that already own a home and are locked in at a low mortgage rate, trading that rate in for a higher rate and bigger monthly payment even on a home similar to the one they’re already in may be a non-starter. Homeowners already stay in their homes for 13 years before selling[6], and if some portion decides to stay even longer, it could have the effect of keeping inventory low and competition high.

The uncertain stock market and broader economic conditions also could make it more difficult for people to cash out some of their investments to use as a down payment.

As for renting, after reaching record highs, rents are now only 1.4 percent higher year-over-year in December, which may induce higher-earners to continue renting.[7]

Methodology

  • Unless another data source is cited, the data are from a Zillow analysis of U.S. Census Bureau American Community Survey (ACS), 2005-2017, made available by IPUMS-USA, University of Minnesota, www.ipums.org.
  • Renters are defined as households that rent their home. Buyers are defined as households that own their home and moved in the past 12 months. Homeowners are households who own their home and have not moved in the past 12 months.
  • All income figures are inflation adjusted to 2017 dollars.
  • The top 35 metros were selected based on population size in the 2010 decennial census.


[1] U.S. Census Bureau New Residential Sales.

[2] Zillow Group Consumer Housing Trends Report, 2018. www.zillow.com/report

[3] Zillow Group Consumer Housing Trends Report, 2018. www.zillow.com/report

[4] https://www.zillow.com/research/inventory-climbs-november-2018-22411/

[5] https://www.zillow.com/research/rising-rates-home-buyers-22531/

[6] Zillow Group Consumer Housing Trends Report, 2018. www.zillow.com/report

[7] https://www.zillow.com/research/growth-slowdown-december-2018-22763/

Source: zillow.com