Why Rising Rent Means You'll Never Start That Business! Housing Costs vs Entrepreneurship

When housing costs rise 10%, young renters see business formation fall 8% while homeowners see it rise 7%

Jimmy’s Office in the Nail Salon in Better Call Saul

Rising rents don’t just squeeze household budgets. They’re systematically excluding young Americans from starting businesses, creating a hidden barrier to economic mobility that compounds existing inequalities in wealth and opportunity.

New research by Seungyub Han (Louisiana State University) and Jin Seok Park (University of Southern California), “Priced Out of Entrepreneurship? Rising Local Home Prices Lower Economic Opportunities for Young Renters,” tracks metropolitan areas from 2005 to 2019 and reveals a neat little pattern: when local housing costs rise relative to incomes, entrepreneurship falls sharply among renters while increasing among homeowners. The effect is largest among younger workers, the cohort that historically drives business formation and economic renewal. This isn’t a temporary phenomenon tied to the financial crisis. It’s a structural feature of how housing markets now shape who can take economic risks.

The traditional pathway (accumulate savings while renting, buy a home, leverage equity to start a business) no longer functions in high-cost markets where down payments exceed what most young workers can save in a decade. Renters now account for roughly a quarter of all self-employed workers, with their share growing steadily over two decades. Declining homeownership rates, delayed household formation, and rising housing costs in productive metro areas mean more Americans spend their prime working years as renters in markets where affordability has deteriorated sharply.

Key Data

The affordability-entrepreneurship gap is large and growing:

• Young renters see an 8.4% decline in self-employment rates when housing price-to-income ratios rise 10%. For incorporated businesses with higher capital requirements, the effect is similar though less precisely estimated.

• Young homeowners see a 6.8-7.7% increase in self-employment when affordability declines, driven by expanding home equity that relaxes borrowing constraints.

• Renters now comprise 26% of the self-employed, up from 22% in 2000. Among young self-employed workers, nearly 40% are renters, precisely the group most exposed to economic (and affordability) shocks.

• The mechanism is structural, not cyclical: Excluding the 2008-2011 financial crisis from the analysis produces similar results, confirming this isn’t driven by temporary credit dislocations.

• Effects concentrate where liquidity binds tightest: The negative impact is strongest for unincorporated self-employment (necessity-driven businesses), non-tradable sectors, and asset-light industries where personal savings matter most.

• Demographic disparities amplify: Among renters, affordability shocks hit hardest for women, Asian workers, and US-born citizens, groups already facing systematically tighter credit constraints.

The research uses an instrumental-variable strategy, exploiting the fact that metro areas with inelastic housing supply (constrained by geography or regulation) experience larger price swings from the same national housing demand shocks. This isolates affordability effects from confounding local economic conditions like job growth or industry composition. The researchers interact national housing demand shocks with local housing supply elasticity from Saiz (2010), creating plausibly exogenous variation in affordability while controlling for local labor demand (Bartik shocks), credit supply (Community Reinvestment Act small business lending), unemployment, and population growth.

Two Opposing Mechanisms

The same housing market shock affects renters and owners through opposite channels, formalized in a theoretical model that guides the empirical analysis.

The Renter’s Liquidity Trap. Entrepreneurship and homeownership compete for the same scarce resource: savings. A young San Francisco renter earning $75,000 faces monthly rent consuming 40-50% of take-home income while needing a $150,000+ down payment to buy a home and access mortgage credit.

Higher rents raise the required return for entrepreneurship through two channels. First, they reduce risk-bearing capacity: lower expected future consumption makes households less willing to bear entrepreneurial income uncertainty. Second, they create a rent-burden channel: when borrowing constraints bind (typical for young households), higher rents increase the marginal utility of current consumption, making upfront entrepreneurial investment effectively more expensive.

The data confirm the model’s predictions. Young renters show 8.4% declines versus 5-6% for older renters, consistent with accumulated savings buffers. Effects are sharpest for unincorporated self-employment (freelancing, personal services, small-scale trade) that depends on personal cash flow. Incorporated businesses show effects too, but less consistently, since people clearing that higher capital threshold are already less liquidity-constrained.

The Owner’s Collateral Advantage. Rising house prices relax borrowing constraints through the collateral channel: higher home values expand borrowing capacity against housing wealth. A homeowner whose house appreciates from $400,000 to $500,000 can access $60,000-$80,000 in additional home equity credit. This borrowing (cash-out refinancing or home equity lines) remains the largest startup capital source for small business owners.

The model predicts (and data confirm) this effect is strongest for younger owners leveraging recent purchases. Young homeowners show 6.8-7.7% increases in self-employment; older homeowners show small, statistically insignificant effects.

Picture two 32-year-olds with similar education and income, one renting and one owning a Seattle condo purchased three years ago. When prices jump 20%, the renter’s monthly cost rises $400-$600 while saving capacity falls. The owner’s housing cost stays fixed (30-year mortgage) while net worth increases $60,000-$100,000 and credit access expands.

Selective Effects Reveal the Mechanism

Affordability shocks suppress entrepreneurship most in non-tradable sectors tied to local demand (retail, personal care, restaurants, construction) and asset-light industries (personal services, consulting, small retail). Tradable sectors and capital-intensive industries show weaker effects, confirming affordability shocks crowd out entry at the low fixed-cost margin.

The businesses that don’t form aren’t Silicon Valley startups but local service businesses (childcare providers, contractors, personal trainers, restaurant owners) providing neighborhood employment and community ties. Historically, these sectors offered economic pathways for people without credentials or connections.

Demographic disparities amplify. Women renters show particularly large declines, reflecting tighter credit access and smaller financial buffers. Asian renters (disproportionately in high-cost coastal metros) see sharp drops. Non-citizens and immigrants face even larger barriers, consistent with weaker credit histories and family wealth networks. Groups with systematically lower wealth and tighter credit access are precisely those for whom housing costs matter most, producing less diverse entrepreneurship concentrated among people with wealth buffers.

System Interactions Compound the Problem

Housing markets interact with other institutional failures:

• Restrictive zoning limits supply in productive metros

• Mortgage credit flows to home purchases but not business investment

• Financial regulations favor home equity borrowing over unsecured business loans

• Student debt delays homeownership, extending rent exposure

These are policy choices, not accidents. We’ve designed a housing finance system treating homes as leverageable assets and made homeownership the primary wealth accumulation vehicle. This works for people clearing the ownership threshold while systematically excluding everyone else from similar credit access.

Geography compounds constraints. High-cost metros (coastal cities, tech hubs, Sun Belt areas) offer the strongest agglomeration benefits but steepest affordability declines. Young entrepreneurs needing both affordable housing and strong business ecosystems increasingly can’t find either.

Generational timing matters. The 2010s brought declining homeownership, rising student debt, and delayed household formation for younger cohorts entering labor markets during recessions. These cohorts face lifetime earnings losses they’ll never recover. Adding housing-constrained entrepreneurship creates compounding disadvantages across multiple opportunity dimensions.

Why This Matters for Economic Dynamism

Business dynamism (the rate new firms enter, grow, and replace less productive incumbents) has declined sharply since the 1980s. Employment at young firms has fallen nearly half as a share of total employment.

Rising housing costs explain part of this pattern. High-productivity cities that should attract entrepreneurs have become less accessible as success drives housing costs beyond what young workers can afford without family wealth.

Feedback loops self-reinforce the problem. Deteriorating affordability concentrates entrepreneurship among homeowners who leverage collateral, raising the capital threshold for entry. Would-be entrepreneurs without housing wealth face higher barriers and steeper failure odds. Meanwhile, declining renter entrepreneurship reduces local business ecosystem diversity, potentially lowering innovation and dynamism in compounding ways.

The Political Economy Trap

Expanding housing supply (zoning reform, reduced parking requirements, streamlined permitting) would directly address affordability and indirectly boost entrepreneurship. Cities that allow building maintain better affordability.

But supply expansion faces entrenched opposition from homeowners who benefit from scarcity, vote at higher rates, organize effectively through neighborhood associations, and have clear financial incentives to block construction. Young renters have weak political voice. Existing homeowners dominate local land-use politics. Entrepreneurship advocates don’t connect housing costs to business formation.

Local governments control land use without bearing costs of exclusionary policies. Restricting supply raises renter prices while enriching homeowners who dominate local politics.

Breaking this requires either shifting land-use authority to higher government levels (California’s SB 9 and SB 10) or changing local government incentives by conditioning state aid on housing production. Both require political will to overcome status quo beneficiaries.

Policy Alternatives

Credit Market Reforms. Regulations favor home equity borrowing over unsecured business loans. Reforming rules to treat business investment like education loans (lending based on expected returns rather than current collateral) could expand access. This requires accepting higher default rates, but society might prefer that to excluding capable entrepreneurs lacking housing wealth. Public bank models providing seed funding or loan guarantees deserve attention, along with expanded microloans and community lending.

Housing Assistance. Rental assistance targeted to young entrepreneurs faces implementation challenges. Means-tested vouchers create cliff effects and work disincentives. Universal vouchers are expensive. Entrepreneur-specific subsidies invite gaming. The least distortionary approach may be broad-based subsidies reducing rent burden, but this requires substantial fiscal commitment and political consensus that doesn’t exist.

Complementary Barriers. Tax incentives disproportionately benefit higher-income entrepreneurs, but targeted versions (expanding SBA microloans, refundable credits for first-time business registration) could reach liquidity-constrained groups. Combining accelerators and incubators with grants or low-interest loans could address capital constraints these programs currently don’t solve.

A System Producing Predictable Outcomes

We’ve designed a system where housing wealth determines business capital access, then allowed housing to become unaffordable where economic opportunities are strongest. This isn’t about individual shortcomings or changing preferences. It’s a system producing predictable outcomes from its incentive structure.

When metropolitan areas become unaffordable, they don’t just redistribute wealth from renters to owners. They redistribute economic opportunity. Young workers aren’t becoming more risk-averse. They’re responding rationally to incentive structures where starting a business means foregoing homeownership (the primary wealth accumulation vehicle), making entrepreneurship a luxury good for those with homes or family wealth.

Whether we have political capacity to redesign this system remains open. What’s clear: the current system systematically excludes younger and less wealthy Americans from a traditional mobility pathway. That’s a policy choice, not economic inevitability. We could choose differently by expanding supply in high-opportunity metros, reducing business credit barriers for non-homeowners, and recognizing housing policy is entrepreneurship policy. But this requires confronting entrenched interests who benefit from current arrangements.