How is the economy? Your answer may depend on whether you own your home or not.
The latest data shows renters are struggling more financially, while homeowners continue to reap the benefits of refinancing during the pandemic when mortgage rates were at historic lows.
This growing divide has complicated the Fed’s efforts to reduce inflation, as homeowners work to prop up consumer prices with their discretionary spending power.
“The post-pandemic economy is treating people very differently, which is causing headaches for central bankers,” Jeffrey Roach, chief economist at LPL Financial, wrote in a research note this week. “The extreme differences can often be traced back to living situations, where renters have a very different experience than homeowners.”
‘Unbearable for tenants’
Since the start of the pandemic, rents have risen more than 20%, with renters paying about $370 more each month on average, Roach noted.
“A difficult 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? Nearly 1 in 5 renters (19%) reported that they were late paying their rent at some point in the past year, Federal Reserve report this week It found, up from 17% in 2022.
They were also more likely to report not paying all of their bills in the previous month than homeowners, even when controlling for income. Across every type of bill — water, gas, electric, phone, internet or cable bill — renters had higher rates of nonpayment.
“Even if they’re not struggling to pay rent, rent takes up a huge portion of their income because they have very little left 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 is doing very well.”
“If you have a home, you feel better.”
Homeowners’ fortunes look much different.
Nearly a third of homeowners who took out a mortgage refinanced in 2020 or 2021 when mortgage rates hovered around 3% or lower, Roach wrote. As a result, they were able to save approximately $220 per month on average, with their mortgage payments accounting for roughly a historically low share of their disposable income.
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’ll feel better about it,” Roller said.
Meanwhile, home prices have risen since the outbreak of the pandemic, causing home prices to rise Record level of home equity Owners can take advantage of refinancing or home equity loans and lines of credit.
This additional money “added to wasteful spending and created a headache for policymakers dealing with an economy less sensitive to interest rate policy,” Roach wrote.
Homeowners are more likely to own equity of tenants, so they have also benefited from good gains in the stock market over the past year and a half.
To be sure, homeowners have had to absorb higher homeowners’ insurance costs.
The Fed study found that those who bought in the past two years when mortgage rates doubled during the Fed’s anti-inflation campaign paid an average of $2,100 per month on mortgage payments, or $700 more than those who bought before the pandemic.
More homeowners remain in better financial shape than before the pandemic and that has “kept the economy out of recession,” Roach wrote.
The question remains how long this will last.
Jana Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @Jana Herron.
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