The Widening Gap: U.S. Rent CPI and Hourly Earnings

Article Objectives:

• Rising Rent CPI: Rent Consumer Price Index (CPI) is outpacing the growth in average hourly earnings in the United States, widening the affordability gap.
• The Cumulative Effect: Rent CPI has grown 10.54 percentage points more than average hourly earnings since 2008.
• Affordability Challenges: The data suggests potential affordability issues if the trend continues, impacting U.S. workers across most industries.
• Macroeconomic View: The trend has wider implications for consumer spending, economic mobility, and long-term socio-economic policies.

PONTE VEDRA, FL - One of the most overlooked issues facing multifamily investors today is the widening gap between the Rent Consumer Price Index (CPI) and Average Hourly Earnings. While market fluctuations are a normal part of any economy, it's a different matter altogether when the cost of housing—a basic human need—continually outpaces what people earn. Our comprehensive analysis draws on time-series data we collected from the Bureau of Labor Statistics and Federal Reserve Economic Data to shine a light on this disconcerting trend. While median incomes (blue line) have averaged around 2.94% since 2008, average rental CPI (orange line) has averaged 3.37%, a difference of 0.43%.

Cumulative Impact Over Time

A difference of 0.43% per year may not seem like a big difference, but compounded over 14 years, it can really add up. While year-to-year changes are informative, it's the long-term trends that often tell the most compelling stories. Since 2008, Rent CPI has grown by a total of 67.52%, while average hourly earnings have seen a growth of 56.98%. That's a staggering 10.54 percentage point difference in cumulative growth. In 2022, the cost to rent went up by more than double the median wage increase (almost 9% compared to just over 4%, respectively). The purple shaded areas of the bar graph below illustrates how much more rent CPI growth grew than hourly earnings.?

Macroeconomic Spillover Impacts

The trend has broader economic consequences that extend beyond individual households. When a larger percentage of income is allocated to rent, disposable income for other consumption categories can be affected. However, this isn't merely a signal for potential economic deceleration; it's a cue for economic realignment. Sectors such as e-commerce, remote work technologies, and gig economy platforms may see gains as households adjust their spending habits.

Additionally, the trend points to a geographic economic shift. High housing costs in economically vibrant areas could lead to the emergence of secondary cities and suburban areas as new hubs for economic activity. This, in turn, could foster a more balanced economic development, reducing the strain on overly congested urban areas.

Investment Strategy Insights

For our investment partners, understanding the nuances of this widening gap is critical. The data offers an analytical lens for identifying markets that are more resilient to these trends. As we continuously monitor a range of data points, our investment strategies are not just responsive to current conditions but are proactively designed to mitigate future risks and capitalize on emerging opportunities.

Conclusion

The divergence between Rent CPI and hourly earnings serves as an economic indicator that is rich with insights. It provides a nuanced view of market dynamics, which, when understood deeply, reveals not just challenges but also opportunities. Our rigorous, data-driven approach ensures that we are optimally positioned to navigate these complex landscapes.

As we delve deeper into this and other macroeconomic indicators, we maintain our commitment to being your trusted partner, offering investment strategies that are both intelligent and humane.

by Brian Underdahl, Chief Analytics Officer

Nuvo Capital Partners