Welcome back to Home Economics, a data-driven newsletter about the housing market. Today we’re taking a closer look at the fashionable idea that high earning households are choosing to rent over buy.

SPEED READ

The holidays are a time for family, friends, good food, and—in our household—Covid. This was the second holiday season in the last three that me and my wife were sick and stuck at home. The silver lining was that I had plenty of time to catch up on reading.

One article that piqued my interest was from The Wall Street Journal on December 22nd. Titled The Rise of the Forever Renters, it describes “higher-income and older renters flooding into America’s towns and cities searching for luxury without commitment.” The article cites some surprising statistics. Here’s one: “the number of renters earning over $200,000 a year is up fourfold since 2010”.

Seems fishy to me

The WSJ is not the only publication to weave a narrative about high earners opting to rent. Earlier this year, RentCafe published a widely cited article about a record number of millionaire renters. And in their “America’s Rental Housing 2022” report, Harvard’s Joint Center for Housing Studies (JCHS) argues that higher income households—those with incomes above $75,000—have driven the bulk of the increase in rentership since 2009.

Underlying all of these is the suggestion that big earners are developing a taste for renting over homeownership.

At first glance, this feels intuitively possible. Renting has always been more common amongst lower income households, but soaring home prices and high mortgage rates may have conceivably pushed more households—even those higher up the income ladder—towards renting.

That said, a careful analysis of census data shows no such turn towards renting, including for high earners. In fact, over the last 5 years, households across the income spectrum have moved in the other direction, towards ownership.

DEEP READ

What’s going on? To butcher Tolstoy, every misleading analysis is misleading in its own way.

Take that WSJ statistic that caught my eye: “the number of renters earning over $200,000 a year is up fourfold since 2010”. By reverse engineering the WSJ’s analysis, I calculated that, between 2010 and 2022, the number of renter households earning over $200,000 rose by 762,000. But I also discovered a statistic they didn’t report: at that same income level, the number who own rose by 4.4 million.

The simple fact is that at higher income levels, the number of renters dwindles to a very low level. For high-earning households, it only takes a small percentage increase in ownership to swamp the effect of a large percentage increase in rentership.

There is a similar lack of context lurking behind the eye-catching statistic that a record 4,453 millionaire households are now renting their homes (reported by the WSJ, Business Insider, Fortune, and Bloomberg, among others).

In fact, 91% of millionaires own their homes. And while 4,453 is, technically, a record number of millionaire renters, the number of millionaire owners was 10x higher in 2022 and also set a record.

It turns out, there are just a lot more millionaires than there used to be, and the vast majority of them own their homes.

The miniscule size of the cohort of millionaires in the rental market also makes this entirely irrelevant for anything other than gossip: 4,453 millionaire renters is small compared to the total number of millionaire households (48,000), and a drop in the bucket¹ compared to the total number of renting households (82 million).

Three fixes

But there are other problems with these analyses. In particular, almost all of them examine the number of high income households who rent. But even if rich people’s appetite for renting didn’t budge, the number of them who rent would still rise.

This is because, for one, the population is growing. The number of renting households across all income categories should grow. Second, incomes are rising. The number of renters in higher income buckets should rise more than at lower incomes, even if incomes are adjusted for inflation (and even if using the percentage increase in high income renters).

These analyses can be corrected in three ways.

First, breaking the population down into income groups, such as quartiles, corrects for the effect of rising population and rising incomes.

Second, we should also look at ownership: renting is rising, but maybe owning is rising too. We should compare the share of renters vs owners in each quartile.

Third, we should be careful about percentage changes in small populations.

These are the adjustments we made in the first chart (above), which shows that rentership at high incomes has barely changed over 20 years, and has actually decreased over the last 5 years.

To be fair, there is some merit in the notion that renter incomes are rising quickly. 2011 seems to have been the inflection point: since then, median renter incomes are up 62%, while median owner incomes are only 40% higher. But this rapid rise in renter incomes is not due to high earners shifting towards renting, but rather by more rapid income gains at the lower end of spectrum.

The bottom line is that high home prices may push higher income households into renting in the future. But that doesn’t appear to be happening yet.