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May 13, 2019

Los Angeles rental crisis continues in 2019

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Renters face a growing number of obstacles in California, as the state’s growing renter population vies for a limited number of rentals. The situation is most extreme in the Los Angeles metropolitan area.

True, rents in Los Angeles aren’t as high as in San Jose or San Francisco, cities both infamous for their high housing costs. But when compared to area incomes, rents are exceedingly high, dragging down individual finances and the broader economy. A recent Zillow report shows the rental crisis in Los Angeles is unprecedented.

Going into 2019, a median-income renter needed to spend 45.7% of their income on a typical rental in Los Angeles. For reference, financial experts recommend residents spend no more than 31% of their monthly income on rent or mortgage payments.

This problem is much worse for lower-income households. The average share of income spent on an average rental is:

  • 121% for renters in the bottom third of income earners who are renting in the low tier;
  • 48% for renters in the middle third of income earners who are renting in the mid tier; and
  • 30% for renters in the top third of income earners who are renting in the high tier.

This means renters in the bottom third of income earners need to have at least two, and likely more, roommates to qualify to pay rent. Middle-income earners also need at least one roommate to make ends meet. In practice, the share of renters living with at least one roommate (or the share of homes with at least two heads of households, which does not include married couples) in Los Angeles is:

  • 55% of 23-29-year-olds;
  • 26% of 30-39-year-olds;
  • 20% of 40-49-year-old;
  • 28% of 50-59-year-olds; and
  • 27% of 60-69-year-olds.

Not only do Angelinos end up paying a significant chunk of their paycheck toward rent — a quality of life and economic issue — but they have difficulty finding a place to live. The rental vacancy rate was 3.6% as of the first quarter (Q1) of 2019, according to the U.S. Census. This is below the state average of 4.2% and further below what is considered to be a “healthy” rental vacancy rate of around 5.5%.

The result is a vicious cycle for real estate, as renters spend so much on rent they have little to nothing leftover to accumulate savings and become homeowners. Over half of Los Angeles renters who spend more than 30% of their income on rent save zero dollars each month.

Los Angeles has one of the lowest homeownership rates in the state, which is really saying something since California has one of the lowest homeownership rates in the nation. Just under 50% of Los Angeles residents owned a home in Q1 2019, below the 54% state average, according to the U.S. Census. To keep things in perspective, the average U.S. homeownership rate is 64% in 2019.

More housing is the solution

Short-term solutions to Los Angeles’ rental crisis are plenty, ranging from rent control to job-specific housing to building more homeless shelters. But the only long-term fix is to create more housing, especially for low- and moderate-income households.

Residential construction increased at a glacial pace in 2018. Multi-family construction — where most of the rental stock comes from — rose just 2% over the previous year in Los Angeles. This is better than the statewide decrease in multi-family construction of 7%. But construction numbers still fall woefully short of what is needed to keep up with the increase in jobs and working-age population.

Since 2017, California legislators have passed dozens of new laws to encourage more residential construction. While the effects of these laws have not yet begun to make a noticeable dent in the state’s affordability crisis, the years ahead will see some improvement. Once rents fall back in line with incomes, more renters will be able to save, and a healthier, more stable renter demographic will emerge, one more likely to eventually become homebuyers.

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