The crisis in affordable rental housing: How we got here and finding our way forward
(This article first appeared as a two-part series in HousingWire)
Across America, millions of households are struggling to find a place to rent they can afford. Fewer than half will find affordable rental housing; fewer than one in four of our poorest renter households will do so. And even those who find a rental will likely face rent hikes in the near future that may eat up any increases in their income. This crisis threatens household stability, education, health, the environment, and the quality of our neighborhoods.
The cost of the crisis is very real to me. In the 1960s, my father lost his job. He got sick at the factory where he worked and he was not part of a union – our home was foreclosed on. We moved around a bit before we settled into public housing in South Philadelphia. We were lucky. Our rental home was affordable; it was a safety net for us. But I saw so many others struggling to find jobs with decent wages, good schools for their children, and safe neighborhoods. All while grappling with the lack of stable, affordable housing.
At Fannie Mae, we provide affordable housing opportunities for renters and owners. It’s what we focus on every day. This focus gives us some insight into the causes and potential solutions to the current affordable rental crisis.
To help spark creative solutions, we must better understand the scope of the affordability problem, how we got here, and what some communities are doing to address the issues.
What It Means to be Cost Burdened
More than one-third of U.S. households – about 44 million – are renters, and nearly 60 percent are classified as low income (households with income from 51 percent to 80 percent of the Area Median Income or AMI), very low income (31 percent to 50 percent of the AMI), or extremely low income (below 30 percent of the AMI). These are the families most likely burdened by rent costs.
Households that spend more than 30 percent of their income on rent are considered “cost burdened.” While about half of all renter households are cost burdened, an estimated three-quarters of extremely low-income renters are in that category.
Households spending more than half their income on rent are considered to be “severely cost burdened.” About one quarter of all renter households fall in that category, yet that percentage soars to 59 percent of extremely low-income renters.
For Every Affordable Unit Added, Two Are Lost
That’s because there’s a disconnect between the units being built (the supply) and who’s able to rent them (the demand).
While it costs about as much to build an apartment project for low-income tenants as a market-rate project, many builders are focused on projects that will command higher rents. According to the Dodge Data & Analytics Construction Pipeline, about 343,000 apartment units were completed in 2016, with another 400,000 units expected to come online in 2017. Most of this new supply is high-income rentals located in large cities where Millennials are driving rental demand.
When it comes to new affordable units, about 100,000 are built each year on average, says the National Housing Trust. Yet the market supply is not going to keep up: For every new affordable unit added, two are lost from deterioration, abandonment, or conversion to market-rate housing.
Further, according to the National Low Income Housing Coalition, about 360,000 privately owned, federally subsidized units have been converted to market-rate housing since 1995, with another 10,000 to 15,000 units leaving this inventory every year. In addition, more than 2 million units are at risk of loss over the next decade.
How Did Supply Dry Up?
During the Great Recession, multifamily construction fell sharply. After the recession ended in June 2009, demand started to rise – both from previously displaced renters and from new Millennial first-time renters. However, multifamily construction didn’t rebound in a significant way until 2013, and has been playing “catch up” ever since.
In addition, construction of subsidized housing has declined as a percentage of all new multifamily construction and now represents only around a fifth of new construction annually – not enough to keep pace with demand.
Finally, costs of construction, including rising wages for construction workers nationally, have increased across the country, not just in strong metropolitan areas.
As a result, without a subsidy, developers are only willing to undertake new projects where they can generate higher rents.
Increased demand for rental housing stems from several factors. Millennials, those 75 million young adults born after 1980, are one of the biggest drivers of current rental housing demand. In record numbers, they are deferring homeownership, choosing to rent rather than buy. High-income renters, typically those who can afford to buy a house, are choosing to rent an apartment instead. They now represent more than 20 percent of all renter households. Collectively, this attributes to a 26 percent increase in estimated national rent levels since 2005.
Wage Growth is Starting to Line Up with Rent Increases
Wages and asking rent levels are two factors that play a big role in affordability. All other things being equal, it’s more affordable to rent when wage growth keeps pace or stays ahead of rent increases.
It looks like that’s starting to happen. Over the next two years, growth in household income is likely to outpace growth in asking rents by about 2 percent, cumulatively. But that’s based on projections showing that median household income might grow by nearly 7 percent while rent growth returns to more normalized levels in the 2 to 2.5 percent range.
Even so, this will contribute to only modest improvements in rental housing affordability.
Working Toward Solutions
While the need to build or rehabilitate more affordable units is urgent, we can’t simply build our way out of the rental housing crisis. Instead, we need to find a way to help lower-income households afford the housing that is available to them. Communities are doing this with a variety of tools.
Inclusionary Zoning – Many cities and some states now require that new apartment projects include units that are affordable to renters with low to moderate incomes, a practice called inclusionary zoning.
While popular, this has been controversial because it is expensive for the developers. The cost of construction and real estate taxes can be as high for the low-income units as for more expensive units, even though the affordable units generate less revenue. We need to find ways to make inclusionary zoning effective for low-income renters while not penalizing developers.
Housing Choice Vouchers – Another strong policy tool to help tenants pay for rental housing is the “Section 8” Housing Choice Voucher Program. Low-income renters in the program pay 30 percent of their incomes toward housing, with the federally funded program paying the balance to the landlord up to a set maximum. Housing vouchers are administered by local public housing agencies.
Demand is so great, however, that thousands of families can linger for years on waitlists in some cities with no assurance they will ever receive a voucher. Today, about 2.2 million low-income renter households receive vouchers, while millions of households are eligible but don’t receive them. By some estimates, only one in four eligible households receive any kind of rental assistance. Created in the 1970s, it may be time to take a fresh look at the voucher system to ensure we’re effectively serving today’s households.
HUD Rental Assistance – The housing community also can support efforts to modernize aging public housing stock by participating in the Department of Housing and Urban Development (HUD) Rental Assistance Demonstration program. The program allows local housing authorities to leverage private sector financing to improve the physical condition and extend the useful life of public housing properties throughout the U.S., so we don’t lose these valuable affordable housing units.
Federal Low-Income Housing Tax Credit Projects – Continuing to provide loans for federal low-income housing tax credit (LIHTC) projects, which attract private capital to the low-income housing rental market, is another critical component of affordable housing. The LIHTC program has built nearly 3 million apartment units, housing about 6.7 million low-income families and currently finances the construction and rehabilitation of almost all subsidized housing in the U.S. Between 90,000 to 95,000 apartments units are built each year using LIHTC, helping thousands of Americans find affordable housing.
Moving Forward Together
There is no panacea for solving this crisis. Solving this puzzle will require multiple solutions and multiple partnerships. We’ll need the collective wisdom of lenders and renters, developers and housing experts, and advocates for health, education, and the environment.
Fannie Mae wants to work with all those who have a stake in affordable housing to take a fresh look at the path forward. Specifically, we want to bring together affordable housing investors and state and local government representatives to identify the best ways to create more units that are affordable to low and moderate-income renters. More broadly, we want to expand our network of affordable housing partners to include more investors, lenders, and other organizations with a vested interest in addressing the affordable housing crisis.
We want above all else to help more people in America find safe, affordable options across the nation – new places they can call home.