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Income and Rents: It Takes Money to Make Money

shutterstock_122772919-600x400As apartment rents continue to trend higher, real estate economists are worried income growth isn’t keeping up. After all, an increase in rent means residents are forced to allocate a higher percentage of their income to housing if their paychecks don’t also increase proportionately. Investors, especially in Class B and C assets, are worried that the ability of renters to pay higher rents is nearing a ceiling. As such, investors across all product segments have become more focused on metros with higher wage growth expectations – a backdrop necessary for higher rents moving forward.

At the metro level, the best indicator for wage growth is the average hourly earnings, as reported by the Bureau of Labor Statistics. However, the data is limited – the time series for average hourly earnings at the metro level only goes back to 2007. Since that dataset lacks coverage over multiple real estate cycles, let’s focus on personal income to assess income growth.

Personal income encompasses wages and salaries, investment income, government transfer payments and business income, among others. (For a full definition, visithttp://www.bea.gov/regional/definitions/.) However, personal income does not take into account population growth. So, for the purposes of our analysis, we’ll focus on per capita personal income, which takes the total personal income divided by the population of the area. Per the first chart, the pace of growth in personal income per capita has slowed at the national level over the last 30-, 15-, and five-year time periods. When examining performance among 20 metros during these same time periods, a substantial decline in the lower performers led to a divergence of performance from top to bottom.

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