The economy is in recovery. We think we can say that fairly, especially in comparison to the state of things these past few years. That said, it hasn’t recovered. While we tend to zoom in on the real estate market, it’s conditions are closely tied to the overall economy — wages, job growth, and so on.
It’s true, jobs have been created. But one of the biggest issues facing working Americans — and those of us in real estate — is that of wage stagnation.
Even if we have more jobs, if those jobs aren’t paying enough or changing with inflation, it creates problems.
How Wage Stagnation & Real Estate Mix
Demand for rentals is rising — and so are prices.
With the recovering real estate markets across the country, home prices are on the rise. In competitive markets like Houston, a tight inventory and high prices have pushed many people out of being able to afford a home. Those people turn to renting. Thus the demand for rentals increases. And then rent prices increase. And then some people are priced out of renting, too. While this only usually happens to those in lower-income situations, it’s far from rare.
Do you know how much you have to make an hour to afford a two-bedroom apartment? Or how many hours you’d need to work weekly at minimum wage to afford a one-bedroom apartment?
Affordable housing units are being squeezed.
When rent is on the rise and wages are rising to meet them, those typically considered middle and high-income end up in properties that lower-income people could actually afford. This decreases the availability of decent lower-income housing for the people who truly need it. One solution is to simply increase the number of affordable housing units across the country, but in a sluggish construction industry, it would be slow going...and a band-aid for the real problem behind it all.
Wage stagnation hinders savings and the real estate market.
Even if people are able to afford to rent, is that really enough? When rent takes up a significant portion of income (and it does — 1 out of 4 households spend more than half of their income on housing costs), it hinders the ability to save and buy. Being unable to save means that the real estate market continues to stall, as fewer people can afford a down payment in addition to difficulties in loan approval. When people can’t buy, it holds back local economy and contributes further to stagnant wages.
So what does it mean for real estate investors?
For real estate investors, it means a look into how ethical our practices are. If we have employees, how well are we paying them? For our rental properties, are our prices fair for our market? Of course, we also want to maintain solid positive cash flow. But what if raising rent isn’t the way to do it?
Rethink your financial strategy and understand that your tenants may be in a very stressful financial situation. While that isn’t to say become lax, it is to say that a dose of compassion and good judgment on your part may be something they really need.
Have you seen wage stagnation affect the real estate market? Share your thoughts in the comments.
image credit: 401kcalculator.org