Demand for Rental Housing at New High

Demand for Rental Housing at New High

Lower homeownership rates and demographic trends are contributing to record growth in demand for rental housing in the U.S.

The pace of multifamily housing construction in the United States has increased considerably since the recent recession, with most of the growth concentrated in the rental sector. Data from the U.S. Census Bureau and HUD show that multifamily housing starts (structures with five or more units) rose to 398,000 in November 2015, an increase of more than 21 percent from a year ago. Yet, according to a recent report from the Joint Center for Housing Studies of Harvard University, the national rental housing vacancy rate is at a 30-year low owing to surging demand driven partly by demographic changes. The biennial report, “America’s Rental Housing: Expanding Options for Diverse and Growing Demand,” also finds that most of the nation’s renters are housing cost burdened, spending excessive amounts of their income on rent as the supply of affordable rental units fails to keep up with the growing need.

The report was released at an event held in Washington, DC, on December 9, 2015, that included a presentation on the report’s key findings and a panel discussion moderated by Emily Badger of the Washington Post. The panelists, Ellen Seidman of Urban Institute, Hipólito (Paul) Roldán of Hispanic Housing Development Corporation, Toby Bozzuto of The Bozzuto Group, and Chris Herbert of the Joint Center, discussed the reasons behind the affordability crisis and offered some solutions.

Behind the Demand

The Joint Center’s report finds that the share of U.S. households that are renting is higher now than in any period since the mid-1960s. This increase, which is seen across a broad spectrum of ages and household incomes, is attributed to lower homeownership rates (the result of the foreclosure crisis, stagnant incomes, and restricted credit access) and demographic trends. The largest increase in renter households from a decade ago is seen in Americans aged 50 to 69 years as aging baby boomers return to renting. Large numbers of millennials in their 20s, an age at which renting is the norm, and members of Generation X who are delaying homeownership are also contributing to the record growth in rental households.

Affordability Crisis

The number of renters who are housing cost burdened, meaning that they pay more than 30 percent of their income toward housing, has also reached record levels. In 2014, more than 21 million households — half of all renter households nationwide — were cost burdened, and more than a quarter were severely cost burdened (paying more than 50 percent of their income toward housing), with a significant portion of these households being families with children. Younger renters under 25 years of age and seniors are experiencing higher cost burdens compared with other age groups. The number of cost-burdened renters has been high in past years, but the affordability crisis is “increasingly afflicting moderate-income households,” said Herbert. Twenty-one percent of renter households with incomes from $45,000 to $74,999 were cost burdened in 2014, compared with 12 percent in 2001. Part of the reason for increased cost burdens, the report’s findings indicate, is that while rents across the nation have spiked, incomes of renter households, particularly those at the lower end of the earnings scale, have declined or shown little growth. In addition, the existing supply of affordable rental housing in this historically tight market is insufficient to meet the demand.

Supply Challenges

The Joint Center’s report notes that the majority of multifamily rentals are being constructed in cities and are priced for higher-income households. For example, the median monthly asking rent for new private rental units completed in the U.S in 2014 was over $1,370, an amount unaffordable to most renters. Bozutto explained that given the high cost of land and construction in urban areas, developers have to build at the high end of the market to achieve an acceptable return on investment. Both Bozzuto and Roldan observed that excessive regulation can increase the cost of building affordable housing, and higher costs require larger public subsidies to make affordable housing developments financially viable. But public subsidies available for affordable housing have declined sharply as a result of funding cuts for the HOME Investment Partnerships Program and other housing assistance programs.

The panelists conceded that NIMBY (not in my backyard) opposition from neighbors contributes significantly to the shortage of affordable housing. Herbert noted that NIMBYism is no longer a suburban phenomenon but is now evident in urban areas, particularly as cities rezone residential areas to higher densities to increase the housing supply. Roldan referred to affordable housing’s “perception problem” — getting people to see affordable housing as important for both low-income and working families is a challenge. Meanwhile, expiring affordability restrictions for Low-Income Housing Tax Credit (LIHTC) and other federally subsidized properties are shrinking the existing stock of rentals available to low- and moderate-income households. Herbert noted that the loss of these affordable units negates any downward filtering of once high-cost rentals, further exacerbating the shortage.

What Can Be Done?

In addition to increasing public subsidies and funding for programs such as HOME and LIHTC, the panelists agreed that stakeholders need to rethink regulatory barriers, such as zoning policies that restrict the construction of multifamily and other higher density affordable housing options. One solution to increase affordable housing that has proven effective in areas such as Montgomery County, Maryland, is inclusionary zoning (IZ). IZ programs require developers to provide affordable units as part of new residential developments. Some localities offset the costs to developers by allowing them to build at higher densities or offering other subsidies and incentives. Bozzuto, whose company has developed several rental communities in Montgomery County, observed that IZ is an important regulatory tool for local governments.

Because of the high level of unmet need, said Seidman, it is vital to preserve the nation’s existing stock of affordable rental housing in addition to promoting new construction. Noting that preservation is significantly cheaper than building new housing, Seidman advocated for maintaining the affordability of units with expiring subsidies and, in particular, preserving two- to four-unit buildings, which are a critical source of affordable rental housing in many communities. These buildings, however, are also more likely to be older and have operating and maintenance costs that cannot be met by rents collected. One solution, suggested Roldan, would be to retrofit affordable housing with energy-efficient upgrades that could generate cost savings and free up capital for maintenance and repairs.

Other approaches suggested by the panelists to meet the demand for rental housing include boosting the homebuying power of low- and moderate-income families with stable incomes and the ability to sustain homeownership by providing them with downpayment assistance and helping them improve their credit scores and increase their savings, which would free up rentals for other households.

Looking Ahead

According to the Joint Center’s report, demographic trends and economic conditions will continue to escalate the demand for rental housing over the next decade, and a range of housing options in diverse settings will be needed to meet the needs of households across the age and income spectrums. A combination of regulatory tools, public subsidies, and policies promoting homeownership are needed to tackle the rental housing challenges facing the nation.