How is the economy? Your answer may depend on whether or not you own your home.
The most recent data shows renters are experiencing more financial hardship, while homeowners continue to reap the rewards of refinancing during the pandemic, when mortgage rates were at historic lows.
This growing divide has complicated the Fed’s efforts to reduce inflation, with homeowners propping up consumer prices with their discretionary purchasing power.
“The post-pandemic economy is treating people very differently, creating a headache for central bankers,” Jeffrey Roach, chief economist at LPL Financial, wrote in a research note this week. “Extreme differences can often be attributed to living conditions, as renters have a very different experience than homeowners.”
“Unbearable for tenants”
Since the start of the pandemic, rents have increased by more than 20%, Roach noted, with tenants paying an average of about $370 more each month.
“A tough housing market for people across the country has become, 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 is it? Nearly one in five renters (19%) reported being late on their rent payment at some point in the past year, according to a Federal Reserve report released this week, compared to 17% in 2022.
They were also more likely than homeowners to report not having paid all their bills in the previous month, even when taking income into account. For each type of bill – water, gas or electricity bill or phone, internet or cable bill – tenants had higher non-payment rates.
“Even if they have no difficulty paying their rent, it eats up a large part of their income because they have very little left for other things in life and this creates anxiety,” Roller said.
“They feel a certain level of economic insecurity … in the middle of an economy that is doing very well.”
“If you own a house, you feel better”
The fortunes of the owners are very different.
About a third of homeowners had their mortgages refinanced in 2020 or 2021 when mortgage rates hovered around 3% or less, Roach wrote. As a result, they saved about $220 a month on average, with their mortgage payments making up an almost historically low share of their disposable income.
And unlike renters, a mortgage payment is a “fairly predictable cost” in the future, Roller noted, making it easier to budget for future expenses.
“I think if you own a home, you feel better about it,” Roller said.
At the same time, home prices have only risen since the pandemic, creating a record level of home equity that homeowners can tap through refinances or home equity loans and lines of credit .
This extra money “added to the spending spree,” Roach writes, “and created a headache for policymakers facing an economy less responsive to interest rate policy.”
Homeowners are more likely to own stocks than renters, so they have also benefited from the stock market’s big gains over the past year and a half.
Certainly, homeowners have had to absorb higher home insurance costs.
And those who bought during the past two years, when mortgage rates doubled during the Fed’s inflation-fighting campaign, are paying an average of $2,100 a month on their mortgage payment, or $700 more than those who purchased before the pandemic, according to the Fed study.
But more homeowners remain in better financial situations than before the pandemic, which has “kept the economy out of the doldrums,” Roach wrote.
It remains to be seen how long this will last.
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
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News Source : finance.yahoo.com
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