Renters in this country are faring far worse in this decade than they have in recent history, finds “America’s Rental Housing”, a report released last month by Harvard’s Joint Center on Housing Studies (JCHS). The report is a must-read for those concerned about the challenges afoot in meeting the country’s need for safe and affordable rental housing. Time is of the essence, suggests the report.
Even as the pace of rental housing development has dropped off with the recession, the demand for apartments affordable to low and moderate income families is set to increase rapidly. By the end of the current decade, there will likely be a 10% increase in the nation’s rental population. While some will rent out of convenience, many more will see rental housing as their only option.
If the current trends continue, with flat incomes and rising costs for housing and other basic needs, increasing numbers of renters will be forced to forgo basic necessities to keep their housing. With 41% of renters in the country’s bottom income quartile, it’s likely that more people will become homeless.
Rental challenges in the JCHS report can be grouped into three buckets: 1) more people cannot afford rent, 2) the nation is losing its affordable rental housing, and 3) there are fewer channels to finance and subsidize rental housing.
More people cannot afford rent
The JCHS report finds a significant upward trend in severely cost burdened households, defined as low-income families paying more than half their incomes for housing. This trend becomes more pronounced over a longer time horizon. While about 12% of all renters faced a severe cost burden in the 1960s, the percentage more than doubled to 26% by 2009. Adjusted for inflation, renters’ incomes are now below what they were in 1980, while rents have increased nearly 20 percent.
The impact of cost burden is hardly trivial-- it forces low-income families to skimp on other necessities to maintain their housing. The report points out that the lowest-income families with severe cost burdens were found to spend 52% less on health care and 37% less on food than families with similar incomes that were affordably housed.
The highest incidence of severe cost burden among civilian adults is among service workers; approximately one-quarter of those employed in personal care, cleaning, food service, and healthcare support face this situation.
Some believe that the recent recession made housing more affordable. Although average rents fell slightly during the recession, the bump in renters with a severe cost burden from 2007 to 2009 represented the largest increase in a decade of increases, finds the report.
Losing affordable rental housing
One reason more people are facing the burden of unaffordable rents, JCHS points out, is that the nation has been steadily losing both its rent-assisted housing and non-assisted (market rate) housing with low rents, without replacing lost units.
Assisted stock: less of it, and less affordable
As of 2009, there were about 6 million publicly assisted units in the country (including units occupied by rental voucher holders, public housing, and rent-subsidized and privately owned tax credit units), which account for 16% of all rental units. Since the mid-1990s, the inventory of housing with rents based on income has decreased by 18%, or 700,000 units. Primary reasons for this include demolition of worn out public housing and private owners opting out of government programs, such as long-term rent assistance contracts.
The decline in the production of affordable units has also been dramatic. During the 1970s about 300,000 publicly subsidized apartments were developed each year. By the mid-90s this pace dropped to 150,000. For the last five years only 75,000 assisted units have been created annually.
While the assisted units of the 1970s were deeply subsidized to be affordable to those with minimal incomes, nearly all of the new assisted units are financed with the federal low income housing tax credit program. Under this program, rents are not income-based and typically run in the $700 to $900 range. Thus, they are not nearly as affordable as HUD’s public housing or privately owned housing with federal rent subsidies.
Tenant subsidies: in demand, on the decline
On the tenant side, though the need for public subsidy has increased markedly during the last 20 years, the number of families with rental vouchers to fill the gap between what they can afford and the cost of an apartment has remained flat. As of 2009, only one of four income-eligible renters was receiving housing assistance.
For many renters the level of subsidy needed to make an apartment affordable is substantial. A quarter of all renters have total incomes lower than what they could earn working full-time at the federal minimum wage.
Meanwhile, even if the supply of rental vouchers had been increasing, production might still be needed. That is, only about 69% of voucher holders were able to use their subsidy according to a study cited by the report, because voucher holders could not find housing in the right price range a nd meeting quality standards and because some landlords would not accept vouchers.
Affordable private market stock: important, declining, and difficult to maintain
While assisted-stock and vouchers are important, the private market supplies three times as many low-cost units as there are subsidized units with comparable rents. By far, the largest loss of affordable housing has been in the private market, particularly among the nation’s most affordable apartments. In the last decade, 28% of private-market units renting for under $400/month were lost through demolition, rent increases, or conversion to another use.
The existing private market rental inventory includes about 10 million apartments renting for under $600/month, the majority of which are in 1-4 unit buildings. The low-rent stock is at risk simply because it is aging and expensive to maintain and repair. In 1989 the median age of all rental housing was 26 years; by 2009 this median age increased to 38 years.
To maintain a rental property that is under 10 years old, JCHS points out, an owner needs to budget 8% of rent for capital expenditures. For a 20+ year-old properties, this ratio increases to 15%. For this reason, landlords often increase rents as units age, or allow properties to deteriorate until they are no longer habitable. In addition, the cost of rehabbing or building new units is prohibitive for low-rent units without subsidy.
Few Channels to Finance and Subsidize Rental Housing
Any hopes of expanding the nation’s supply of rental housing will require an increased supply of both private financing and public subsidy. Yet it is unclear where the additional sources of capital would come from, with even current sources in jeopardy.
Financing in jeopardy
With the current housing and financial crisis, median values of multi-family properties have declined more from peak to trough (42%) than have single family homes (32%). So perhaps it is not surprising that lenders have tightened credit standards for multi-family loans substantially. Whereas other financing sources were available during the housing bubble years, the vast majority of financing for rental housing now is available only through FHA, Fannie Mae and Freddie Mac.
Yet the Obama administration has proposed reducing the role of these government sponsored agencies, or in the case of Fannie and Freddie, phasing them out of existence. This would place rental financing at a crossroads, jeopardizing even maintenance of the existing inventory.
Financing is also needed to refinance existing loans. Much of the rental housing developed in the last ten years was financed with long term payment schedules but that require short term balloon payments. By 2012, 15% of all rental debt will require refinancing; another 23% of debt will need to be refinanced by 2015.
Some types of rental housing are easier to finance than others. Most rental lenders are geared to finance projects with more than 50 units. 1-4 unit buildings can be financed through single-family loan programs, but financing for investor-owned small properties is far harder to come by since the foreclosure crisis. The hardest of all rental units to finance are properties in the 4-19 unit range, get these properties account for about 25% of all rental housing.
Subsidy sources few, at risk
As for assisted rental development, subsidies have dwindled since the 1970s. The federal low income housing tax credit program is now the most important sources of subsidy for new rental production. Yet it has become less dependable.
In 2009, investor interest in housing tax credits dried up as the housing market turned and the bubble burst. Now that the market for tax credits has largely returned, a major tax overhaul being considered by Congress as part of a deficit reduction strategy places the entire tax credit program at risk.
Rental Housing Worth Supporting
Aside from the fact that renting is typically the lowest-cost housing option, notes the report, there are additional advantages to renting over owning a home. For instance, the transaction costs of leasing a home are substantially less than buying. Renters are also freed of most responsibilities for maintenance, leading to more predicatable housing expenses and less of a draw on time. Renters’ capital is also freed from being tied up in non-liquid, real estate assets, and not subject to the risk of market decline.
Of course there are many reasons to support home ownership through public policy, rental housing also needs support, particularly now. The country is experiencing significant economic uncertainty, and workers need flexibility to move to pursue employment. Many households have been displaced from home ownership due to foreclosure, and increasing numbers of aging Americans often wish to be freed of the responsibilities of home ownership.
With unemployment likely to remain high and the rental supply tightening, pressures on affordability are poised to increase. But, the report concludes, policy efforts to address rental housing can restore communities hit by foreclosures and reduce carbon emissions and environmental footprints of housing. It is in everyone’s interest to collaborate in meeting the nation’s rental housing challenges.
To read "America's Rental Housing: Meeting Challengs, Building on Opportunities" in full visit http://www.jchs.harvard.edu/publications/rental/rh11_americas_rental_housing/index.html.
