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Housing and Economic Insights Report — March 2022

Data Science team • March 11, 2022

At Esusu, we’re closely following what is happening in the economy and how it impacts renters as well as property owners and operators. These are the findings that we’re keeping an eye on in March.

 

Key findings:

  • Inflation is rising at the fastest rate in decades, savings are dwindling as a result. When it comes to financial planning, this depletion of savings can impede renters’ ability to pay on time.
  • Low- and moderate-income Americans are hurting most. Their savings are the ones seeing the most rapid decline. This lack of savings will likely lead to housing insecurity for many renters and may also hurt your portfolio performance. 
  • Enabling your residents to increase or establish their credit scores is one of the best ways to help with financial insecurity. We’ve broken down the cost savings associated with higher scores.
  • Our recent company data shows how improving credit scores can help renters. Take a look at the trends we’re seeing amongst Esusu residents.

 

Inflation keeps climbing

In our last Housing and Economic Insights Report, we highlighted how inflation has hit a 40-year high and the household budgets are being squeezed as a result. The February Consumer Price Index data showed inflation continuing to increase to an annual rate of 7.9% compared to a year prior, highlighting the high cost of essentials including food, energy, and transportation. Additional price increases are also expected in the future due to the Ukraine crisis and the associated pressure on crude oil prices.

Wages for most workers are not able to keep pace with these price increases and recent surveys by Gallup have shown that confidence in national economic conditions has fallen to its pandemic low.

 

Source: Bureau of Labor Statistics, Consumer Price Index

 

Researchers at Moody’s Analytics have begun to quantify the extent to which inflation is hurting average households by comparing the prices they paid when inflation was 2.1% (the average rate before the pandemic) versus 7.5% today. They found that inflation is costing the average American household $276 a month. 

 

What inflation means for low-income Americans

We know different groups of people consume products and services uniquely, meaning the impact of inflation will vary across the country’s socioeconomic groups. 

One thing we can expect is that price hikes are particularly difficult for lower-income households who already have tight budgets (in the graph below, these are households in the “lowest income quintile”). The majority of their budgets go towards essentials like food, energy, and housing, categories which have seen the largest price increases.

 

Source: Bureau of Labor Statistics, 2020 Consumer Expenditure Surveys

 

Lower-income households are also the least likely to have a savings cushion or access to credit to weather the higher prices. 

According to the FDIC, we know that unbanked households are more likely to be:

  • Credit invisible: In 2017, 80% of unbanked households did not have a credit score (compared to 20% of all American households).
  • Financially insecure for emergencies: 74% percent of unbanked households did not save for unexpected expenses or emergencies in 2019.

All this shows that those experiencing cash flow swings, temporary income shortages, or unexpected expenses may need to rely on non-bank credit use to get by. 

 

Reducing portfolio risk and eviction rates through credit building

So what’s the harm in using non-bank credit (like payday loans, auto titles, pawnshops, or tax refund anticipation loans)? The fees for using non-bank credit are much higher than those associated with traditional bank credit (like credit cards, personal loans, or lines of credit from a bank).

The Consumer Financial Protection Bureau documents that typical payday loans charge a fee of $10 to $30 for every $100 borrowed. A common $15 per $100 borrowed for a two-week loan will equal an annual percentage rate (APR) of 400%. In comparison, even the credit cards with the highest APRs of 30% are still a far better deal for the borrower. 

 

Source: Consumer Financial Protection Bureau

 

When faced with a decision between a 30% APR and a 400% APR, the choice appears to be an easy one. Many low- and moderate-income Americans are not being offered a choice. Their low or nonexistent credit scores generally mean that they must take the much more costly 400% APR payday loans, often trapping them in a cycle of debt. 

One of the ways that property owners can help their renters combat higher inflationary prices is by offering renters ways to build their credit scores. Rent reporting, verifying on-time rent payments to the credit bureaus to increase credit scores, is one of these options. 

Access to good credit will not only provide tenants with more lending options, but it will generally give them better rates allowing them to save on interest payments. In turn, improved scores help ensure that owners and operators will have more financially stable renters in their properties.

 

What we’re seeing in the market

At Esusu, we have already seen the positive impact of rent reporting on the lives of residents. As of December, close to 17,000 residents have established credit scores with rent reporting.  

Between January 2020 and December 2021, the number of residents who had a “poor” credit score (below 600) decreased by 35%. In the context of what we discussed above, that means a significant number of renters were able to access better means of credit (bank credit). During the same time period, the average tenant showed an increase in their credit score of 77 points from 592 to 669, making them eligible for prime loans with lower interest rates.

 

Want to prepare your portfolio and help your renters withstand the continuous changes to the economy?  

Learn more about our rent reporting platform for property managers and owners.