New Fed Research Says the Pandemic Rent Shock Landed Hardest Where Rents Started Lowest

A working paper published by the Federal Reserve Board on September 3 takes a question that has been argued anecdotally for five years and puts data on it. When remote work let higher-income households move, where did the rent increases land?

The answer in the paper is that they landed on the cheap places, and that being cheap in absolute terms - not being affordable relative to what people locally earned - is what predicted the increase.

Rents grew more in areas with lower pre-pandemic rents but not in areas with lower rent-to-income ratios, consistent with higher-income remote workers moving away from high rent areas to more affordable areas.

Why the distinction matters

Those two ways of measuring affordability usually move together, and separating them is the point of the paper. A place with a low absolute rent looks cheap to someone arriving from a coastal metropolitan area on a coastal salary. A place with a low rent-to-income ratio looks affordable to the people already living there.

If rent growth tracked the second measure, the story would be about local demand. It tracked the first. That is the signature of arrivals whose incomes were set somewhere else.

The consequence for existing residents is arithmetic. If the rent rises because of what newcomers can pay, the increase is not indexed to what incumbents earn. The paper finds lower-income households experienced proportionally larger rent increases relative to their income than median renters did.

How it was measured

The authors - Douglas A. Webber, Isabella Agnes, Jessica Liu, Fatimah Shalaan, Michelle Tran and Erin Troland - combine administrative data on new leases from RealPage with household-level rent and income data from the American Community Survey. Geographic areas, defined as Public Use Microdata Areas, are grouped by their pre-pandemic rent levels and by their pre-pandemic rent-to-income ratios, and rent growth is compared across those groups.

The paper is careful about one interpretive trap it flags itself: area-level rent-to-income ratios reflect both compositional changes in renter populations from mobility and changes in local rents. When people move, both the numerator and the denominator of a local affordability ratio change, and the ratio can move without any individual household's situation changing at all.

What the size of the squeeze looked like

A separate Federal Reserve Bank of Cleveland commentary published in March, by senior research economist Lara Loewenstein, gives the national magnitudes for the same period. Between 2019 and 2023, nominal median rent grew 6.4% a year, against 2.74% a year over the preceding decade. Nominal renter income grew 4.4% a year.

• The share of renters spending more than half their income on rent rose from 25% in 2019 to about 28% in 2022 and 2023
• Among renters in the bottom third by income, that share went from 62% to 67%
• Among renters in the top third, it stayed at 1% throughout
• Real residual income - what is left after rent, adjusted for inflation - fell 0.28% a year for the median renter, 0.06% a year for the top third, and 7.1% a year for the bottom third, a decline of more than a quarter over four years

The Cleveland commentary also located the fastest rent growth in the non-coastal western states - Montana, Idaho, Nevada, Utah, Colorado and Arizona - and in the Sun Belt, including Tennessee, the Carolinas, Georgia and Florida. Those are, broadly, the places that were cheap in 2019.

The exit that stayed closed

The usual pressure valve for renters priced out of a market is buying. It has not opened. Freddie Mac's survey put the 30-year fixed mortgage rate at 6.71% on September 3, up from 6.66% the week before and 6.50% a year earlier. The 15-year averaged 6.04%.