Inflation's Surprising Impact: Homeowners vs. Renters

Bank of America Study Insights on Inflation

New data from Bank of America shows that inflation is affecting renters more than homeowners. One of the key findings of a study from Bank of America is that renters are spending less on expenses outside of housing compared to homeowners. This doesn't come as a surprise, considering that rents continue to increase nationwide. This will obviously have a more significant impact on renters than on homeowners, who typically have a fixed-rate mortgage. One of the advantageous aspects of our country's housing market is the availability of 15-year and 30-year fixed-rate mortgages.

This allows homeowners to weather periods of high inflation without being as severely impacted, primarily because a significant portion of most people's expenses are allocated to housing. Homeowners are not experiencing the same level of impact as renters, who find themselves with less disposable income for dining out and engaging in other activities.

Rising Rent vs. Fixed-Rate Mortgage

Finding that renters are spending less money outside of housing than homeowners are, is no surprise because renters are having to adjust their budgets for rising rents. In an apartment, your initial year's rent might be $1,500, but by the second year, it's likely to increase. It could rise to $1,600 initially, then further to $1,750 the subsequent year, then another $1,900 with no end in sight. Unfortunately, there isn’t an end to rent increases because there's not an end in sight to inflation.
The printing of money is expected to continue, following the targets set by the Federal Reserve which is currently wanting a 2% inflation rate. With that, rent prices will continue to rise. However, if homeowners have a 30-year fixed-rate mortgage and their payment starts at $1,500, it will stay the same for the whole term or only change a little. You may have some slight increases with insurance or taxes going up over the years, but for the most part, your payment is staying low and staying fixed allowing you to ride out those periods of high inflation.

Renters Are Significantly Cost Burdened

Another factor that's particularly affecting renters at the moment is that, until recently, we were experiencing a relatively low level of rent inflation. It was only at 2% back in 2021, but it suddenly jumped to 8.8% in March 2023, according to the Consumer Price Index. That's why renters are being so burdened by inflation right now, they're getting hit in multiple ways and they're having to find ways to cut expenses and spending to be able to keep up with escalating rent hikes.

On top of all that, 49% of renters are what you call cost-burdened. One out of two of the renters in this nation are spending more than 30% of their income towards housing. Staying at or below 30% is considered a healthy balance between income and housing.

The challenge is that almost half of the people in this country are burdened by housing costs, and the situation actually gets worse from there. Of the 21.6 million households being cost-burdened, over half of those households (11.6 million) are facing severe cost burdens. This means they are spending 50% or more of their income towards housing, preventing them from saving money to eventually own a home and escape the cycle of constantly pursuing higher rent payments.

Benefits of the Fixed-Rate Mortgage

Homeowners are experiencing inflation a whole lot differently than renters are, all because of this key concept of the 30-year fixed-rate mortgage. This is a feature that sets our country apart from the rest of the world, where such extended fixed-rate mortgages are not commonly available. It's really the power to unlock wealth in four key ways:

Fixed Monthly Payment

Homeowners benefit from a fixed-rate mortgage, ensuring consistent monthly payments throughout the loan term without inflation-related hikes, leading to better budgeting. In contrast, renters often face annual rent increases due to inflation.

Principal Savings Account

A part of each mortgage payment reduces your loan amount, leading to full repayment in 15 or 30 years based on the length of the loan. It functions like a forced savings account you can tap into when selling or refinancing the home.

Leveraged Appreciation

Leveraged appreciation allows you to benefit from the entire value of your home's appreciation, not just your down payment. For example, with a 20% down payment and a 5% home value increase, you gain 25%, or even a 10% down payment could lead to a 50% return.

Tax Benefits

Through tax savings, you can deduct a portion of your mortgage payment, potentially reducing the amount of taxes paid and leading to a refund. Adjusting your W-4 can further decrease monthly tax payments, boosting your monthly cash flow.

If you're wanting to learn more about how a 30-year fixed-rate mortgage can help you get off of this inflation rollercoaster and help you start building wealth for yourself, give us a call at 256-333-MOVE or contact us here

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