WASHINGTON — None of the country’s 50 largest housing markets offer affordable rent for workers who earn the federal minimum wage, says a new Clever Real Estate study. Buffalo, N.Y., has the most reasonable rent, although it takes 39% of a renter’s monthly income, far more than the commonly used 30% affordability threshold.
Full-time workers earning the federal minimum wage of $7.25 an hour bring home roughly $1,257 per month before taxes. To put about one-third of that toward rent, monthly payments must be around $377 for an individual or $754 for a couple. Yet, the lowest monthly rent found was $961 in Oklahoma City, which would require a minimum wage of $18.48.
“Just last month, I worked with a family in Chicago making minimum wage,” says David Kindness, certified public accountant at Best Money. “Their rent consumed 65% of their income, leaving barely enough for food and utilities.”
Increasing the federal minimum wage would bring some relief, but it’s only one piece of the puzzle. Experts say rent won’t come down without increasing the housing supply.
Efforts to increase federal minimum wage
The federal minimum wage, established in 1938, was $0.25 an hour. It rose somewhat steadily over the years, hitting $7.25 in 2009, where it remains.
To keep up with inflation, the federal minimum wage should be around $10.59 an hour. However, recent failed efforts to increase rates make today’s federal minimum wage worth 29% less than in 2009.
Is a federal minimum wage still relevant?
The minimum wage is a highly politicized topic. Proponents say it’s necessary to pay workers a fair wage, although what constitutes a “fair wage” can vary from market to market. The term often describes compensation that aligns with a worker’s value, not affordable living.
Conversely, a minimum wage can limit workers whose skills don’t merit a higher rate. In some cases, entry-level workers’ productivity may only be worth $10 an hour, but by law, they must earn $17. Businesses would then have to weigh whether the loss in productivity is worth the wage and may instead look for workers with more experience.
“It can end up inadvertently hurting the exact people they’re trying to help,” says Dr. Shelton Weeks, finance professor and director of the Lucas Institute for Real Estate Development & Finance at Florida Gulf Coast University.
As U.S. citizens wait for Congress to act, 34 states, territories, and districts have passed higher minimum wages. Weeks says shifting minimum wage increases to the state level could be wise, as local market rates could dictate pay rather than a national standard. Living costs vary widely from state to state; Hawaii has the highest cost of living in the country — nearly 73% more than Mississippi’s, the lowest.
“It would be more dialed into the economic situation there, but it still runs the risk of damaging the opportunity set for a low-skilled laborer,” Weeks says.
Minimum wage vs. common expenses
An annual federal minimum wage salary of about $15,000 pre-tax doesn’t go far. Renters must also consider other expenses, like utilities, food and groceries, debt and insurance.
The national average rent for a one-bedroom apartment is $1,558 per month. That alone is beyond what federal minimum wage workers earn monthly. Basic utility costs — electricity, gas, water, and fuel — are about $250, depending on location and unit size. Add in other everyday expenses — cell phone plans, internet, renter’s insurance, car or student loans, credit card debt, among others — and it’s easy to see just how tight a minimum wage can be.
According to the Living Wage Institute, workers who earn $15 an hour make just 65% of what they need to meet basic financial requirements. However, Weeks says the federal minimum wage should be considered a starting point for entry-level workers who can use this position to gain experience and build skills.
“When you get a job at a minimum wage, it allows you to develop your human capital and make yourself a more valuable employee going forward so you can demand higher wages,” he says.
Relief for renters
Raising the minimum wage, whether at the federal or state level, is only part of the solution to affordable housing. Landlords and property managers can also offer flexible lease terms and rent control measures in the short term.
Daniel Rivera, owner of Proactive Property Management in New Jersey, says innovative solutions, like improved energy efficiency in buildings or shared housing options, can help lower costs.
Property managers can also use tools like Obligo, a fintech app offering a credit-backed alternative to a traditional security deposit so lessees can put that money toward rent. Sharing resources like local housing support programs and rental assistance through the U.S. Department of Housing and Urban Development (HUD) can help renters uncover more affordable housing options.
Local governments play a role as well. They can offer tax incentives to developers who include affordable units in their projects or update zoning laws to all multi-family housing in prime areas.
“My recent analysis showed that converting even 10% of single-family zones to allow duplexes could create thousands of affordable units,” Kindness says.
Depending on location, renters may find buying a home more affordable. Loans requiring little money down could drop monthly mortgage payments below rent costs.
Kindness points to a recent client in Indiana who purchased an $85,000 home as an example. Their mortgage is $650 monthly, while rent is $900. However, it’s crucial to consider other homeownership costs like maintenance, property taxes, insurance, and real estate agent fees.
The affordable housing crisis
High-priced rent is just another example of the nation’s affordable housing crisis. The country’s largest metro areas offer no options that won’t leave single minimum wage workers rent-burdened. However, they aren’t the only ones affected. Even those who need short-term rentals, such as when buying and selling a home simultaneously, will struggle to tack rent onto a monthly mortgage payment.
Boosting the minimum wage in any capacity can bring relief, but it will take a substantial increase. Weeks’ research shows the average national rent at $2,063 a month. At a 30% income-to-rent ratio, renters must make at least $82,500 annually — nearly $40 an hour.
“There are two big things we as a nation can do about this problem: control inflation overall and figure out how to increase the housing supply,” he says. “At the end of the day, addressing the housing shortage is how we keep costs lower, whether it’s rental or for purchase.”
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