Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Rising Rent Is Eating More of Your Paycheck Than Ever
Transcript
- Lucas: You get a raise — let's say four percent, which is roughly what the average private-sector worker saw over the past year. And yet, by the end of the month, it feels like nothing changed. If you're renting, there's a very specific reason for that. Luna: Rent. It's the biggest line item for most people, and it's been climbing faster than almost anything else. Lucas: Right. So let's put some numbers on this. Average hourly earnings for private workers hit $37.40 in April, up from $37.35 the month before. That's a slow and steady climb. But the national median rent for a new lease? According to Apartment List, it's up about 5.5 percent year-over-year as of May. Luna: So rent is growing faster than wages — and it's a much bigger chunk of your budget. That gap is where the raise disappears. Lucas: Exactly. And we're not just talking about a few cities. The rent to income ratio for new leases nationally has hit 32.4 percent. That's the highest on record. For context, financial advisors typically say you should spend no more than 30 percent of gross income on housing. So the average new renter is already over that threshold before they even turn on the lights. Luna: And that 30 percent guideline was set when rents were lower relative to income. Now, with energy costs up — that $450 extra per household from the Iran war — it's even tighter. You're paying more for gas to get to work, more to heat your apartment, and more for the apartment itself. Lucas: The Iran war effect is real. The CNBC headline from last week said the average household is paying $450 more on gas and energy. That's not in the rent check, but it's competing for the same pool of money. So your raise gets sliced three ways: higher rent, higher energy, and then everything else that's still sticky with inflation. Luna: And sticky is the right word. Core PCE — the Fed's preferred inflation gauge — came in at 3.3 percent annualized in April. That's down from its peak, but it's not falling fast. Services like rent, healthcare, insurance — those are the ones that linger. Lucas: Housing services specifically — that's the category that includes rent and owners' equivalent rent — makes up about a third of the CPI basket. So when it runs hot, it pulls the whole index up. In April, shelter costs were up 5.2 percent year-over-year. Compare that to overall CPI at 3.4 percent. Shelter is the tail that wags the dog. Luna: So what's actually driving rent? Is it just demand from a strong labor market, or is there a structural supply problem? Lucas: It's both, but the supply side is especially grim. The National Association of Realtors estimates the U.S. is short about 3.8 million housing units. That's for both owned and rented. And even though we're building apartments at a decent clip — multifamily starts are up — most of that new supply is at the high end. Luxury units with granite countertops and in-unit laundry. That doesn't help someone looking for a $1,200 one-bedroom. Luna: Right — new construction tends to be 'filter up' rather than 'filter down.' It takes years for luxury buildings to become affordable, if they ever do. Lucas: And in the meantime, vacancy rates are tight. The national rental vacancy rate was 6.4 percent in the first quarter, according to the Census Bureau. That's low historically. When vacancies are below 7 percent, landlords have pricing power. They can raise rent and still find a tenant. Luna: So the typical renter is stuck. Wages go up four percent, rent goes up five and a half percent, energy costs go up because of geopolitical shocks. It's no wonder consumer sentiment is low. Lucas: Yeah, and that's the puzzle for the Fed. They're watching the labor market — which is still in decent shape, as Kashkari said — but they also see inflation not coming down fast enough. If they cut rates too soon, they risk reigniting housing demand and pushing rents even higher. If they hold, they keep mortgage rates high, which discourages homebuilding and keeps rental demand elevated because people can't afford to buy. Luna: It's a trap. And it's one that directly affects the paycheck to cost of living equation we talk about on this show. Lucas: If walking through the economy with us has made something click — like why your raise feels sideways — I'll just say this. The reason these episodes stay ad-free and focused on the numbers is listener support. People who find them useful, and want to keep that going. If that's you, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it really does help. And it keeps us independent, which is how we want to be. Lucas: So back to the rent question. Can anything break this cycle? One potential bright spot is remote work. If companies stay flexible, workers can move to cheaper metros. We've seen some of that — population shifts to Sun Belt cities like Phoenix and Nashville — but those cities are now seeing their own rent spikes. Luna: Right — the problem just moves. And in many of those places, local zoning laws make it hard to build enough housing to keep up. Lucas: Zoning reform is the big policy lever. Some cities — Minneapolis, Portland, Oregon — have eliminated single family only zoning. Early data suggests it's helping, but it takes years to see the effect. In the meantime, renters are squeezed. Luna: So what's the takeaway for someone listening right now? If you got a four percent raise this year, but your rent went up six percent, you're effectively taking a pay cut in terms of purchasing power. Lucas: That's exactly right. And that's why we track this. The wage number alone doesn't tell the story. You have to look at what those dollars actually buy. And right now, housing is the biggest leak in the bucket. Luna: We'll keep watching it. Thanks, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.