Home prices are soaring, rents are falling

The disparate impact of the recession on high income and low income households in driving the housing market in two directions at once.

Job losses have been concentrated among the lowest earning workers, who are disproportionately renters. Meanwhile high earning workers have seen no net job losses, and they are disproportionately homeowners and home buyers.

The K-Shaped Recession

When the Covid-19 virus struck in early 2020, it abruptly plunged the nation into the sharpest economic downturn we’ve ever recorded.  But job losses weren’t even distributed across the economy.  Some workers, especially those in front-line service work, were much more likely to lose their jobs (and to be unable to work-at-home), while others have pretty much kept their jobs, despite disruptions to commuting and work routines.  What we’ve observed is what many are calling a “K-shaped recession” with devastating economic consequences for some, and no change in earnings for others.

Harvard economist Raj Chetty and his team at Opportunity Insights have assembled an impressive array of high-frequency big data from private sources to provide an unusually detailed look at the change in the economy in the wake of the Covid-19 outbreak.  Their website, Track the Recovery, has a compelling chart that shows the very different employment trajectories of highly paid and low paid workers.  They’ve broken up all US workers by earnings quartile; this chart shows the employment levels for those in the lowest quartile (annual earnings under $27,000 annually) and in the highest quartile (over $60,0000).  While employment for high wage workers is actually higher now than before the pandemic, employment for low wage workers has plummeted by 21 percent since January of 2020.  The recession is essentially over for high paid workers, but lingers on for those with the lowest earnings.

A principal reason for this divergence has to do with the differential effects of lockdowns and business closures on different occupations.  High paid professional workers have vastly more opportunities to continue their jobs by working at home.  Service and retail workers at essential businesses, meanwhile can’t “zoom it in” and have experienced much greater layoffs and reductions in hours of work.

The K-Shaped Housing Market

The K-shaped trajectory of the overall economy is mirrored in the housing market.  Home prices and rents have moved in opposite directions since the start of the pandemic.  Home price inflation (shown in blue), according to the Case-Shiller National Home price index had been in the 4-5 percent range prior to the pandemic, have essentially doubled to more than nine percent.  At the same time, the BLS estimates of rents (shown in red) paid by US city residents have fallen from a little under 4 percent year over year, to barely two percent.  (The yellow shaded area is the recession)

Other sources of housing market data confirm the K-shaped divergence in rents and housing prices since the advent of the Covid-19 pandemic and recession.  Here we’ve mapped monthly year-over-year changes in housing prices (from Zillow) and apartment rents (from Apartment List.com).  These data show that the rate of home price inflation, which had been ebbing for the previous two years, has essentially doubled from 4 percent annually to 8 percent annually since the onset of the pandemic.  Meanwhile rent inflation, which had been steady at about slightly over 2 percent per year has turned negative, and is declining at about a 1.5 percent annual rate.

Low wage workers are renters; high wage workers are homeowners (and home buyers).

There’s an obvious explanation for the different trajectories of house prices and rents:  Low income workers rent; high income workers own and buy homes. High income households have been barely grazed by the Covid-19 recession.  In fact, the combination of low interest rates and enforced savings (because many kinds of consumption spending, including dining, entertainment, travel and even much retail have been constrained by lockdowns), mean higher income households may find housing a much more attractive spending item.  If you can’t go out to dinner, or take a vacation, you have more money to spend on a new home.  Low wage workers are in the opposite situation.  Low wage workers have borne the brunt of the recession; they are also much more likely to be renters than higher income households.

According to data from the 2019 American Community Survey—via the indispensable IPUMS* website—among working age Americans, households with incomes of less than $40,000 a year (roughly the bottom quartile of households in this category), about 66 percent are renters.  In contrast, of households in the top quartile (with incomes of more than $100,000 per year), 78 percent are homeowners.  The decline in employment during this recession has been concentrated on those households most likely to rent.  Meanwhile, employment among those households most likely to be homeowners has actually increased.  This divergence clearly explains why rents are falling, while home prices are rising:  In the aggregate, renters are bearing the brunt of job losses while homeowners have largely avoided a decline in employment.

The distinctly K-shaped nature of the recession, and of the housing market, are closely related. This sharp and sudden divergence in the fates of high income and low income households, and rental and for-sale housing markets is clearly a product of the Covid-19 recession. Over the course of the coming year, as the Covid-19 vaccine rolls out, and the economy recovers, it seems likely that we’ll see employment gains among low income workers.  As their economic condition improves, that’s likely to diminish substantially the downward pressures we’ve seen on rents for the past year.

* – Steven Ruggles, Sarah Flood, Ronald Goeken, Josiah Grover, Erin Meyer, Jose Pacas and Matthew Sobek. IPUMS USA: Version 10.0 [dataset]. Minneapolis, MN: IPUMS, 2021. https://doi.org/10.18128/D010.V10.0.