Janice R. Andrews
In what condition is the economy? Your answer may differ significantly depending on whether you own or rent your home. Recent research indicates that the wealth difference between homeowners and renters is widening, and that each group is handling the post-pandemic economy quite differently. Due to the difference, the Federal Reserve finds it more challenging to control inflation as homeowners’ discretionary spending continues to raise consumer prices.
According to a research report released this week by LPL Financial’s senior economist Jeffrey Roach, “the post-pandemic economy is treating people very differently, creating a headache for central bankers.” “The extreme differences can often get traced back to living situations, as renters have a very different experience than homeowners.”
Complicated for Lessees
Roach claims that since the pandemic’s beginning, rent has jumped by more than 20%, with renters now paying, on average, $370 more each month. As a result, many renters now find the housing market to be challenging and even intolerable.
“A difficult housing market for people across the country became, in many cases, almost unbearable for renters across the country,” said Shamus Roller, executive director of the National Housing Law Project, in an interview with Yahoo Finance.
Over one in five renters (19%) reported being late on their rent at least point in the previous year, up from 17% in 2022, according to a recent Federal Reserve study. Renters were also more likely than homeowners to report not having paid all of their bills the previous month, even after making adjustments for income. Higher percentages of nonpayment for all bill types—phone, internet, cable, gas, electric, and water—were reported by renters.
“Even if they’re not struggling to pay rent, rent is consuming such a large part of their income that they have very little left over for other things in life, and that creates anxiety,” Roller said. “They feel a level of economic insecurity in the midst of an economy that’s doing very well.”
Having a home makes you feel better
On the other hand, homeowners have profited from more favorable financial conditions. Approximately one-third of homeowners with mortgages refinanced in 2020 or 2021, when mortgage rates were at an all-time low of roughly 3%. By refinancing, they were able to save an average of $220 per month, and as a result, their mortgage payments now constitute a historically low portion of their disposable income.
A mortgage payment, as opposed to rent, is a “fairly predictable cost” that does not fluctuate over time, allowing homeowners to budget for upcoming expenses. “I think if you own a home, you feel better about that,” Roller said.
Furthermore, house values have risen since the outbreak, leading to previously unheard-of amounts of home equity. Homeowners may access their equity through credit lines, home equity loans, or refinancing, providing them with extra cash to go on shopping binges. This has made it more challenging for policymakers to manage an economy that is less sensitive to fluctuations in interest rates.
Additionally, homeowners are more likely than renters to purchase stocks due to the noteworthy gains made in the stock market over the past six months.
Challenges for First-Time Buyers
Even with these advantages, no homeowner is in the same position. For individuals who purchased a home during the preceding two years, costs have skyrocketed due to the Federal Reserve’s attempt to fight inflation by doubling mortgage rates. These homeowners are presently spending $700 more on their mortgage each month than they were before to the outbreak, or $2,100 on average, each month, according to a Federal Reserve study.
Homes have to pay more for homes insurance despite the benefits of ownership, which might strain their budget.
The Financial Divide and Its Effects
The stark contrast between the lives of renters and homeowners highlights the growing economic divide in the United States. This difference not only affects money disparity but also overall economic feeling and conduct.
Rising living costs and the challenge of paying bills on time sometimes leave renters feeling insecure about their financial situation. This uncertainty may reduce consumer confidence and expenditure, two key factors that propel economic progress.
Homeowners are now spending more of their discretionary income as they may use their equity to leverage lower mortgage payments. This expenditure not only boosts economic activity and consumer demand, but it also poses a challenge to the Federal Reserve’s attempts to contain inflation.
Policymakers and economists should be aware of how Americans view the economy in light of their personal circumstances. The disparity between renters and homeowners emphasizes the need for targeted economic policies that deal with the unique challenges that each group encounters. To ensure fair and sustainable growth as the economy recovers from the pandemic, it will be imperative to close this gap.
