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Debunking the Myth of Big City Rents 

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This is part two of an ongoing series about housing costs. Check out part one and three on our blog.

Is it true that nobody under 25 can afford to live in New York City? Or that you need to make at least $200,000 a year to land an apartment in San Francisco?

There’s no denying that rents are on the rise. National rents increased at twice the pace of inflation last year and have been growing nearly double the rate of wages since 2000. That’s a particular problem for renters in cities already known for their high price tag — not to mention those looking to move to such locations. Still, there are plenty of young professionals in the Big Apple and the City by the Bay. How are they making it work?

We turned to our dataset of more than 15,000 loan applications for insight.1 Our analysis found that while young people are spending a pretty penny in metros like San Francisco and New York, their rents are well below the market rate estimates thrown around by the media. In fact, actual rent payments paled in comparison to market rate estimates across every major metro area we analyzed.2

In San Francisco, for example, the median individual rent spend is only $1,225, that’s $3,000 below the $4,225 figure that made headlines earlier this year. In New York City, it’s $1,100, less than half the market rate estimate.

One_Third_Rent-04 (2)

Earnest applicants are spending less than the market rate rent estimate across metro areas.

Those are pretty major gaps for such a large sample size. And while the Earnest data set doesn’t represent every metro denizen, the rent spend vs. market rate difference we found does speak to a larger issue with reported median rents.

The Data Is in the Details

When a media outlet cites a new median rent, it’s often one generated by Zillow, a leading real estate and rental marketplace. But what the media rarely tells you is that these figures typically represent the cost of entire units—and estimated costs at that.

According to Skylar Olsen, a senior economist at Zillow, the company’s algorithm produces these estimates by taking all current rental listings (all homes, condos, co-ops and apartments) and breaking them down by property attributes (number of rooms, square footage, location, etc.). Then, they apply these market rate price points to Zillow’s entire housing stock (which includes single family homes, condos and co-ops, but not apartments). That way, they can track how median rents change over time and across areas using a fixed housing stock.

Zillow’s algorithm doesn’t take current rent payments or shared units into account—nor does it try. In fact, such information about the entire housing market is nearly impossible to obtain, according to Olsen. So, while their data “does give you an idea of what people are paying,” she says the true value is in tracking rent trends: “The biggest advantage—and I think a very important reason to use this kind of metric—is to really get at how prices are changing.”

In contrast, while Earnest’s data from our student loan refinance program can’t be generalized to the rental market as a whole like Zillow’s, it does capture current rent spends in an unprecedented way. The majority of datasets calculate household rent costs, while our data can calculate rent costs per tenant, allowing us to paint a more accurate picture of rent expenses for individual consumers.

How Pricey Are America’s Priciest Cities?

Earnest’s numbers also show an interesting trend when looking at rent spends across metro areas. When we organized our data to show individual rent spend as a percentage of market rate estimates, we found that young people in “premium” cities like San Francisco and New York are actually paying a smaller fraction of the market rate than their counterparts in more affordable cities like Milwaukee and Phoenix.

For example, the median market rate unit estimate for Milwaukee is $1,179, and our applicants report spending a median of $725, or 59% of that amount. In contrast, the estimate for our San Francisco applicants is $4,532, whereas they actually spend a median of $1,225—only 30%.

One_Third_Rent-05 (2)

Young people in pricier metros pay a smaller slice of market rate rent, hinting at greater efforts to keep individual costs down.

Why is this? “It might be the case that in order to make that household income, you’ve got a lot of roommates,” says Olsen. “Often those strategies get obscured [in market rate estimates]—What are people actually doing? What is personally affordable?”

One obvious strategy to make housing personally affordable is taking on more roommates: In fact, while the national average for doubled-up houses (meaning two or more unmarried adults live together) is 32%, Zillow found that the rate of roommates is higher in expensive cities like Los Angeles (48%), New York (42%) and San Francisco (39%). Anecdotally, other common strategies for decreasing individual spend in “premium” metros include installing walls to make temporary rooms, turning the living room into a bedroom, living in a less desirable neighborhood or seeking out a rent-controlled lease.

Of course, this is not to say a housing burden doesn’t exist, or that it’s easy to find affordable housing in pricey markets. But it does show that not all young people should avoid expensive cities.

1.Data reflects applicants aged 18-34 who applied for an Earnest loan with rents of $100 or more and incomes of $1,000 or more.

2.The market rate estimates shown here are based on Zillow’s estimates by zip code, and reflect the zip codes of each person in our dataset.

Conquer your student debt. Refinance now.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.