This is one more follow up to the issue of profits and compensation, and how housing fits into the puzzle. (Previous posts here and here.) This issue of Rental Income and Compensation helps to demonstrate how tight monetary policy exacerbates income inequality and reduces real median incomes. This analysis starts with the understanding that housing markets were, more or less, functional in the 2000's, and the Fed undermined these markets with excessively tight monetary policy that created the financial crisis. (See my Housing label for more extensive discussion of this issue.) Rent inflation and Rental Income were generally high in the 2000's, which would be very unlikely if homes truly were being overbuilt and overpriced.
The mixture of cyclical, regulatory, and monetary factors keeping households out of mortgage credit markets and limiting housing price appreciation and house construction is causing a housing shortage. Two signs of this shortage are the sharp rise in net rental income even above the levels of the 2000s (the first graph) and the resurgence of rent inflation (the second graph).
This means that since 2008, Compensation income is being displaced by net Rental income. For households that rent their residences, this means that real income has been reduced by rent inflation. For households that own their residences, this means that real income has been reduced by rent inflation, but has been replaced by Rental Income. So, policies that are keeping home prices down are benefitting households that own their homes at the expense of households that don't. All households look like they have lower real incomes. However, real income of home owning households is understated because the high inflation of their imputed rent is being deducted from their compensation income and is being re-constituted as capital income.
The third graph shows relative nominal changes in Compensation and Rental Income since the 4th Quarter of 2008. Nominal Compensation has increased $1.2 trillion since the end of 2008. Rental Income has increased by $350 billion. For home owning households, their experienced real incomes have increased by $350 billion more than what their statistical compensation levels are showing, because this rent inflation generally is not affecting their cash flow.
Non-homeowning households have experienced rent inflation as measured, and the gains from that rent are generally accounted for as reductions in their real incomes, relative to nominal incomes, and as profits to firms in the real estate industry.
The housing shortage is reducing the Compensation share of national income through both mechanisms - home owners and renters. One path goes to Rental Income and doesn't really affect real household incomes and the other goes to profit and does really affect real household incomes. Both represent a shift in total income to generally higher income households.
The irony is that so many people seem to agree that rising home prices, by making homes less affordable, are hurting lower income households. If we don't put the clamps down on the banks, they will just drive us right over another speculative cliff, so the story goes. Sadly, the tight regulatory and monetary regime that comes out of this flawed reasoning is the thing that is actually hurting low income households.