How is the economy doing? Your answer may depend on whether you own your home.
The latest data shows renters are struggling financially, while homeowners continue to reap the benefits of refinancing during the pandemic, when mortgage rates were at historic lows.
The growing gap has complicated the Fed’s efforts to reduce inflation, with homeowners driving up consumer prices with their discretionary purchasing power.
“The post-pandemic economy is treating people very differently, causing headaches for central bankers,” Jeffrey Roach, chief economist at LPL Financial, wrote in a research note this week. “The extreme differences can often be traced back to living situations, because renters have a very different experience than homeowners.”
‘Unbearable for tenants’
Since the pandemic began, rents have risen more than 20%, Roach noted, with renters paying an average of about $370 more per month.
“A tough housing market for people across the country became, in many cases, almost unbearable for renters across the country,” Shamus Roller, executive director of the National Housing Law Project, told Yahoo Finance.
How unbearable? Nearly 1 in 5 renters (19%) reported being behind on rent in the past year, a Federal Reserve report found this week, up from 17% in 2022.
They were also more likely than homeowners to report not having paid all their bills in the past month, even when controlling for income. For every bill type – water, gas or electricity bill or a telephone, internet or cable bill – tenants had higher non-payment rates.
“Even if they don’t have trouble paying the rent, rent eats up so much of their income because they have very little left for the other things in life and that creates anxiety,” Roller says.
“They’re feeling a certain amount of economic uncertainty … in the midst of an economy that’s doing very well.”
‘If you have a house, you feel better’
The fate of homeowners looks very different.
About a third of homeowners who had a mortgage refinanced in 2020 or 2021 when mortgage rates hovered around 3% or lower, Roach wrote. As a result, they saved an average of about $220 per month, with their mortgage payments taking up a near-historically low share of their disposable income.
And unlike renters, a mortgage payment in the future is a “fairly predictable expense,” Roller noted, making it easier to budget for future expenses.
“I think if you own a house, you feel better about it,” Roller said.
At the same time, home prices have only increased since the pandemic, creating record levels of home equity that owners can tap into through refinancing or home equity loans and lines of credit.
That extra money “increased spending,” Roach wrote, “and created headaches for policymakers dealing with an economy less sensitive to interest rate policy.”
Homeowners are more likely to own shares than renters, and have therefore benefited from the strong gains in the stock market over the past year and a half.
Certainly, homeowners have had to absorb higher homeowners insurance costs.
And those who bought a mortgage in the past two years as mortgage rates doubled during the Fed’s anti-inflation campaign are spending an average of $2,100 a month on their mortgage payment, or $700 more than those who bought before the pandemic, the study found. the Fed.
But more homeowners are still in better financial positions than before the pandemic and that has “kept the economy out of trouble,” Roach wrote.
The question remains how long that will last.
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
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