New Report: Surge in the Supply of Higher-Cost Rental Housing is Slowing Amidst Persistent Affordability Challenges for Working-Class Households

A decade of unprecedented growth in the rental housing market may be coming to an end, according to our 2017 America’s Rental Housing report, being released today. Fewer new renter households are being formed, rental vacancy rates have risen, and rent increases have slowed. At the same time, renter demographics are changing and nearly 21 million households continue to pay more than 30 percent of their income for rent.

This year’s report paints a complicated picture of the rental market. We’re finally seeing the record growth in renters slow down, but while the market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability to supply housing that is affordable for middle- and working-class renters, let alone those with very low incomes. Addressing these challenges will require bold leadership and hard choices from both the public and private sector.

The report is accompanied by a series of interactive tools and charts that explore rental housing trends at the state and metro level, including cost burdens, affordability, and changes in rental supply and demand. Highlights of the 2017 findings include:

• SIGNS OF A SLOWDOWN. Overall, rents increased more slowly in most markets across the country. Starts of new multifamily units reached a plateau in 2016 and have now fallen by about 9 percent through October 2017.


• THE CHANGING NATURE OF RENTERS. While renters are disproportionately younger and lower-income, growing shares of renters are older and higher-income. For example, the number of renter households earning more than $100,000 per year increased from 3.3 million in 2006 to 6.1 million in 2016.
  
  
• THE CHANGING NATURE OF NEW RENTAL UNITS. Additions to the rental stock are increasingly concentrated at the high end of the market. The share of new units renting for $1,500 or more (in real terms) soared from 15 percent in 2001 to 40 percent in 2016. Additionally, the share of new units renting for less than $850 per month fell from 42 percent of the rental stock to 18 percent. The challenges to building low- and moderate-cost units are most severe in metros like San Jose, San Francisco, Honolulu, and Washington, D.C., where more than 50 percent of all rental units rent for over $1,500 a month.
  
  
• AFFORDABILITY CONTINUES TO BE A MAJOR PROBLEM. Despite rising incomes, nearly half (47 percent) of all renter households (21 million) are cost burdened—meaning they pay more than 30 percent of their income for housing, including 11 million households paying more than 50 percent of their income for housing. While these figures are down slightly from recent years, the number and share of cost-burdened renters is much higher than it was in 2001, when 41 percent (15 million) were cost burdened. Burdens are particularly high in Miami, Los Angeles, New Orleans, and San Diego, where 55 percent or more of renters are cost burdened.


• AVAILABILITY OF RENTAL ASSISTANCE HAS SHRUNK. Even as low-cost housing units are disappearing, rental assistance is becoming harder to access for very-low-income households. The share of very-low-income households who receive rental assistance declined from 28 percent in 2001 to 25 percent in 2015.

Addressing these challenges—particularly expanding the availability of low- and moderate-cost housing options—will require that all levels of government ensure that the regulatory environment does not stifle innovation, and that tax policy and public spending support the efficient provision of moderately-priced housing.

You can view the full report and interactive metro-level tools here.

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LIVE WEBCAST TODAY @ 1pm ET

The release event for America’s Rental Housing 2017, being held today at the Newseum in Washington, DC, will be webcast live from 1:00 – 3:00 p.m. The event will feature keynotes by Senator Maria Cantwell (D-WA) and Pamela Hughes Patenaude, Deputy Secretary, U.S. Department of Housing and Urban Development, as well as a panel discussion moderated by Laura Kusisto, housing reporter for the Wall Street Journal.

For the full agenda or to watch the livestream, visit www.jchs.harvard.edu.

You can also join the conversation on Twitter with #harvardhousingreport

Our Disappearing Supply of Low-Cost Rental Housing

by Elizabeth La Jeunesse
Research Analyst

It’s not an illusion: low-cost rental housing in the US is disappearing. And our 2017 State of the Nation’s Housing report has the numbers to prove it.

Using ACS data from 2005 and 2015, our new report shows how gains in the supply of high-end units and losses of low and modest-priced units over the past decade has shifted the entire rental stock toward the high end. Nationwide, the number of units renting for $2,000 or more per month (in constant, inflation-adjusted dollars) nearly doubled between 2005 and 2015, while the number of units renting for below $800 fell by 2 percent (Figure 1).

Figure 1: Across the US

Released in conjunction with the report, our new interactive tool shows how this shift played out differently in the nation’s 100 largest metropolitan areas. Metros reporting the most dramatic losses of units renting for less than $800 per month included Austin, Seattle, Portland, and Denver – all places where apartment markets heated up in recent years.

Austin’s transformation was particularly striking. The number of units with rents under $800 declined by nearly 40 percent (a loss of around 27,000 units), while those with rents at $2,000 or more increased more than three-fold (Figure 2).

Figure 2: Austin

The pattern was similar in Denver, where the number of units renting for under $800 declined by nearly a third, a loss of 31,000 modest-priced rentals, even as the number of units with rents over $2,000 per month tripled, an increase of more than 24,000 units (Figure 3).

Figure 3: Denver

The largest aggregate increases in high-cost rentals took place in the New York, Los Angeles, San Francisco, and Washington DC metro areas. According to ACS data, the New York metro added nearly 250,000 units renting for more than $2,000 per month, while it lost more than 120,000 units renting for less than $800 a month (Figure 4).

Figure 4: New York

Los Angeles underwent a similar shift in rental stock, losing over 94,000 units renting for less than $800 between 2005 and 2015, while gaining over 200,000 high-cost units (Figure 5).

Figure 5: Los Angeles

The San Francisco and Washington DC metropolitan areas both added over 100,000 high-cost rental units. In San Francisco, the highest-cost rental segment (those renting for more than $2,400 per month) underwent particularly rapid growth, rising by 145 percent, from almost 60,000 units in 2005 to more than 146,000 units in 2015. In contrast, the stock of low-priced rentals in the region, which was quite low in 2005, was virtually unchanged over the subsequent decade (Figure 6).

Figure 6: San Francisco

In general, areas with large numbers of assisted rental units saw little or no growth in their stock of low-priced rentals but significant growth in the most expensive units. For example, the number of units renting for less than under $800 in the Boston metro was basically unchanged, while the number of units renting for more than $2,000 grew by 70 percent (Figure 7).

Figure 7: Boston

Because of such shifts, in most metro areas the share of units that rented for less than $800 a month fell between 2005 and 2015. In Austin, for example, the share of units renting for under $800 per month declined from over a third in 2005 to less than 15 percent in 2015. Similarly, the share of units renting for under $800 per month in New York City metro, home to around 3.5 million renter households, dropped from 23 percent of all units in 2005 to just 18 percent in 2015. And in the Washington, D.C. metro, the number of units renting for less than $800 per month dropped from 15 percent in 2005 to just 10 percent in 2015.

In contrast, both the number and the share of low-rent units rose in a few metros, including the Las Vegas, Cleveland, Sacramento, and Detroit metros. These areas tended to have larger numbers of distressed properties as well as lower rates of economic growth and multifamily construction, which combined to hold down the growth in real rents between 2005 and 2015. In Detroit, for example, there was a 17 percent increase in the share of units renting for less than $800 a month and only a small rise in the number of high-rent units (Figure 8).

Figure 8: Detroit

Use our interactive tool to see how the distribution of rental units changed in the nation’s 100 largest metro areas between 2005 and 2015.

Download an Excel file with the data for each metro area (W-16).

Home Conversions – and Reconversions – Expected to Generate More Remodeling Activity

Kermit Baker
Senior Research Fellow

During the housing bust, and continuing into this housing recovery, large numbers of owner-occupied homes have been converted to rental units. Distressed owner-occupied homes that were foreclosed or sold as short-sales often ended up as rentals because, given the weakness in the housing market and broader economy, few households were looking to buy or were able to buy. Private investors often bought up homes built for owner-occupancy once they saw the strong demand for rentals and the rising rents that these homes commanded.

Once the housing market settles and the demand for homeownership begins to pick up, it is likely that many of these homes will filter back into the owner-occupied housing stock. What will this process look like, and how much modification will be undertaken after this transition occurs? To begin to think about this issue, the Joint Center looked at homes that have already gone through this process; namely owner-occupied homes that have been converted to rentals, and then converted back to owner-occupancy.

While this phenomenon didn’t get much attention until the recent housing crash, it turns out to be fairly common. Starting with owner-occupied homes in 1995 from the American Housing Survey, we tracked these homes for the next 20 years to see which ones changed tenure. Almost a quarter (23.4%) of homes in this 1995 cohort was converted to a rental at least once over this period. While multifamily condos were the most likely type of owner-occupied home to be converted – over half of these condos was rented at least once over this period – so were over a third of single-family attached and manufactured homes, as were over 20% of single-family detached homes.

Note: Sample composed of owner-occupied units in 1995 that were occupied in at least 7/10 surveys from 1995-2013. 

Source: JCHS tabulations of HUD, 1995-2013 American Housing Surveys

Typically, homes that were converted to rentals were somewhat less desirable than homes that were continuously owner-occupied over this period. On average, they 

• are older – pre-1940 homes were 50% more likely to be converted than homes built after 1990,
• have a lower value – homes valued at $100,000 or less were twice as likely to be converted as homes valued at $200,000 or more,
• and are more likely to be located in central cities.

No doubt reflecting the lower value of these homes, spending on home improvement projects was generally lower. For the periods that they were owner-occupied, spending on homes that would be converted to rentals averaged 10% to 15% less than the average for all owner-occupied homes.

The pattern of home improvement spending on converted homes is particularly interesting. For homes that were converted to rentals and then converted back to homeownership, spending on home improvement projects was over 20% below average prior to being converted to a rental unit, and almost 20% above average after that same rental unit was converted back to homeownership.

Notes: Rental sample composed of occupied units in 1995 that were occupied in at least 7/10 surveys from 1995-2013 and were owner-occupied in at least two surveys before first rental period and after last rental period. Average spending is calculated for years in which the unit was owner-occupied. Broader sample composed of occupied units in 1995 that were occupied in at least 7/10 surveys from 1995-2013 and were owner-occupied in at least one survey. 
Source: JCHS tabulations of HUD, 1995-2013 American Housing Surveys

It may be that owners were underinvesting knowing that the home would be converted to a rental, or just the opposite – that the home was converted to a rental because it was in poor enough condition that a sale was difficult. Likewise, after reconversion to an owner-occupied home, higher spending may reflect the need to fix it up after a period of renting, or that the new owner wanted to upgrade the home or customize it to the household’s needs.

There are over four million more rental units now than there were in 2010, and over eight million more than there were in 2005. As many of these rental units return to the owner-occupied stock, we’ll see a boost in home improvement spending. On average, almost $1,000 more is spent per year on home improvements for a home that is converted from renting to owning as compared to a home converted from owning to renting. For every million rentals converted back to homeownership, therefore, there is expected to be almost a billion dollars more spent each year on home improvement activity. 

Surge in New Rental Construction Fails to Meet Need for Low-Cost Housing

Irene Lew
Research Assistant

As we highlighted in our recent America’s Rental Housing report, the housing affordability crisis has shown little signs of abating in recent years, as renter incomes continue to lag behind rising housing costs. Though there has been a ramp-up in rental housing construction, much of this new housing is intended for renters at the upper end of the income spectrum (Figure 1). Indeed, in 2013, four in ten new rentals charged monthly rent of at least $1,000, compared to less than a quarter of rentals built during the heavy volume of multifamily construction in the 1960s and 1970s, which was largely supported by federal subsidies. In addition, the median asking rent for new market-rate apartments has been rising in recent years, reaching $1,372 in 2014, up by more than a quarter from 2012.

Note: Data includes vacant for-rent units and those that are rented but not yet occupied. Excludes no-cash rentals and other rentals where rent is not paid monthly. 

Source: JCHS tabulations of US Department of Housing and Urban Development, 2013 American Housing Survey.  

New construction is providing relatively fewer rentals that are affordable to those with lower incomes. According to the American Housing Survey, new construction increased the total number of units renting for $800 and over by 14 percent between 2003 and 2013—roughly triple the gain in the number of units renting for under $400. In fact, just 34 percent of rental housing built between 2003 and 2013 rented for under $800 in 2013.

Indeed, there is a mismatch between the type of rental housing built over the past decade and the needs of growing numbers of lower-income renters. Between 2003 and 2013, the number of low-income renter households who could only afford units renting for under $400 (at the 30 percent of income threshold) increased by 40 percent but the number of rental units affordable to these households rose just 10 percent on net. Most of this 10 percent increase came from the downward filtering of higher-cost units to lower rents, rather than the construction of new lower-cost units.

Rental housing built during the last decade is increasingly out of reach for many renters. This is true across the metropolitan region. In central cities, nearly half (48 percent) of new units rented for at least $1,000 a month in 2013, in contrast to just 28 percent of rentals built before 2003. On the other hand, while rentals in non-metro areas tend to include a higher share of the lowest-cost housing (units renting for under $400) relative to those in metro areas, new rentals built in these locations are much less likely than older rentals to charge rents this low (Figure 2). For example, only 11 percent of single-family rentals built in non-metro areas before 2003 rented for $1,000 or over in 2013 but this share rises to 53 percent of single-family rentals built in 2003 or later.

Note: Data includes vacant for-rent units and those that are rented but not yet occupied. Excludes no-cash rentals and other rentals where rent is not paid monthly. 

Source: JCHS tabulations of US Department of Housing and Urban Development, 2013 American Housing Survey.  

New construction has also tilted toward larger buildings. At least eight out of 10 apartments (84 percent) completed for rent in 2014 were located in properties with 20 or more units. This is well above the average share—62 percent—of new rental additions in the previous decade (between 1999 and 2009). With developers prioritizing the construction of units in large multifamily buildings, the addition of units in smaller buildings with 2–4 apartments has slowed significantly. Apartments in structures with 2–4 units fell from 20 percent of multifamily completions in the early 1980s to just 3 percent in 2014. And according to the 2013 American Housing Survey, units in small buildings with 2–4 units represented just 16 percent of multifamily rentals built between 2003 and 2013, and just 9 percent of all rental units built over this time period (Figure 3). In contrast, apartments located in multifamily buildings with at least 20 units made up the largest share of new construction—29 percent—during the past decade, followed closely by single-family detached rentals.

Note: Data includes vacant for-rent units and those that are rented but not yet occupied. 

Source: JCHS tabulations of US Department of Housing and Urban Development, 2013 American Housing Survey.  

This decline in the number of new rentals in small buildings with 2–4 apartments is concerning given that units in these structures are typically more affordable than those located in larger buildings. In 2013, 63 percent of units in buildings with 2–4 apartments rented for under $800 a month, compared to 44 percent of those in buildings with 20 or more apartments. The age of rentals in the smallest multifamily buildings may help explain why these units tend to be more affordable than those in larger buildings. They tend to be older, with 44 percent of rental units in the smallest multifamily structures built before 1960, compared to less than a quarter of units in buildings with at least 20 units. However, even when accounting for units built in 2003 and later, those in buildings with 2–4 apartments are still more affordable than those in larger buildings.  Over half (55 percent) of new rentals located in multifamily buildings with 2–4 apartments rented at under $800 in 2013, compared to just 29 percent of units located in buildings with 20 or more units that charged rents this low (Figure 4).

Note: Data includes vacant for-rent units and those that are rented but not yet occupied. Excludes no-cash rentals and other rentals where rent is not paid monthly. Source: JCHS tabulations of US Department of Housing and Urban Development, 2013 American Housing Survey.  

Although rentals in smaller structures with 2–4 units have also remained a key source of low-cost housing, they are also at higher risk of loss. In addition to their age, units in smaller multifamily buildings are more vulnerable to being removed from the affordable stock because they tend to be owned by “mom and pop” investors—typically an individual or couple—who have narrow operating margins due to high property taxes, heavy debt loads and inadequate cash flow. As this 2009 Federal Reserve Bank of Boston report notes, many of these mom and pop landlords hold other jobs that account for most of their earned income and are less likely than owners of much larger buildings—a group that is often comprised of partnerships, real estate investment trusts or corporations— to make an operating profit from their buildings.

A number of barriers exist to developing rental housing at a price point ($875) that the typical renter can afford. At the local level, developers may be faced with land-use regulations that restrict the area available to build multifamily housing as well as the number of units in these developments. These limitations can result in higher per-unit construction costs that are also passed down to tenants in the form of higher rents.

What can be done in order to build housing that low- and moderate-income households can afford, including units near transit-accessible, amenity-rich locations? A recent Urban Land Institute report has suggested that local governments offer publicly owned land at reduced or no cost to developers in high-cost metros such as Washington, D.C., and co-locate affordable housing developments with new public facilities such as libraries or community centers. Local inclusionary housing programs can also facilitate the development of affordable new units, but the amount of affordable housing developed through these programs is small relative to the volume produced through federal subsidy programs like the Low Income Housing Tax Credit (LIHTC) program and HOME. In a 2010 report, the Innovative Housing Institute surveyed 50 inclusionary programs across the U.S. and estimated that they had produced more than 80,000 units since adoption. In contrast, over 2 million affordable rentals have been developed through the LIHTC program and 463,000 units through the HOME program to date.

Last month, Congress approved an appropriation of $950 million in funding for HOME in FY 2016, $50 million above the FY 2015 enacted level. Although this boost in funding represents a dramatic reversal from previous House and Senate proposals that had called for steeper cuts to HOME, the FY 2016 appropriation is still 56 percent below the FY 2006 level. Indeed, the strained fiscal climate may continue limit the availability of subsidies that make it economically feasible for both for-profit and nonprofit developers to build affordable rental housing. 

Single-Family Rentals Have Risen to Nearly a Third of Rental Housing

by Rachel Bogardus Drew

Post-Doctoral Fellow

According to the Census Bureau, the national homeownership rate dropped again in the second quarter of this year, to 63.4 percent. This level represents a nearly 50 year low, and continues the trend of declining homeownership that has been in effect since the end of the mid-2000s housing boom (see my previous blog post on this topic). The flip side of lower homeownership rates, however, is higher shares of households renting their homes. Indeed, rental housing is now more in demand than it has been for decades. While new construction of rental units has picked up in response to this demand, the majority of it has been served by conversions of existing units from owner- to renter-occupied, mostly from the single-family housing stock. As a result, since 2006 the number of single-family detached homes occupied by renters has increased by a third, from 9 million to over 12 million (Figure 1), and now accounts for 29 percent of all rental housing.

Note: Other single-family housing includes attached units and manufactured housing.
Source: Tabulations of the 2000-2013 American Community Survey.

My newest paper takes a new look at single-family detached rental housing, exploring the ways in which the stock and residents of these units differ from other rental housing, and how they have changed over the last decade. It finds that single-family rentals offer an important alternative to single-family owned and multifamily rental housing. Specifically, single-family rentals allow their residents to reap many of the advantages of single-family living, such as larger units than typically found in multifamily housing, while retaining the affordability and flexibility that makes renting an attractive option to households that do not or cannot own. Because most single-family rentals were formerly owner-occupied, however, they tend to be smaller, older, and have fewer amenities than currently owned single-family units (Figure 2).

Note: Other rentals include rented single-family attached and manufactured units.

Source: Tabulations of the 2013 American Community Survey.

While the characteristics of single-family rentals align closely with those of single-family owned units, residents of these homes more closely resemble other renter households. For example, the share of minority households among single-family detached renters (39 percent) is closer to the share among multifamily renters (48 percent) than among single-family detached owner-occupants (21 percent). The same is true of the age distribution of households; 30 percent of single-family renters are under age 35, compared to 38 percent of multifamily renters in this age group but only 10 percent of single-family owner-occupants. The pattern breaks down by family type, however, as single-family detached rental units stand out as having the highest share of families with children (Figure 3).

Note: Multifamily rentals include rented single-family attached and manufactured units.
Source: Tabulations of the 2013 American Community Survey.

While single-family rentals have characteristics that are different from single-family owned and multifamily rental units, also of interest is how these units have been changing as they have grown to become a larger segment of the rental stock. Looking at these changes over time may provide some insights into whether the recent surge in single-family detached rentals is a harbinger of housing demand going forward, or a temporary reaction to the downturn in the housing and home buying markets. Most changes observed over time in the structures themselves, for instance, reflect the evolution of single-family housing in general, which continually replaces smaller, older units leaving the stock with larger and newer units in desirable locations. Some changes in the characteristics of single-family renter households, however, do not follow the same trends as in all households. One notable example of this is the share of middle-aged households (i.e., headed by someone age 35-54), which has been declining in recent years among all housing types except single-family rentals (Figure 4). The same is true of families with children, who generally prefer the features associated with single-family housing, even if they do not or cannot own their homes.

Note: Multifamily rentals include rented single-family attached and manufactured units.

Source: Tabulations of the 2000-2013 American Community Survey.

It is unlikely, however, that these shifts represent a permanent change in the rental market. The middle-aged and family households that account for large increases in single-family rentals are traditionally those most active in the trade-up and first-time home buying market. If economic conditions change in the near future such that home purchases become affordable and attainable to more households, these new classes of single-family renters will probably be among the first to seize their chance to own their own home. In such an event, detached single-family units will decline as a share of all rentals, though likely only back to their former level of around a quarter of the stock, as these units will continue to provide alternative to multifamily rentals and single-family homeownership, and a necessary component of the national housing stock.

Housing Cost Burdens Continue to Strain Renters

by Ellen Marya
Research Assistant

The (somewhat) good news: according to the newly-released 2013 American Community Survey (ACS), housing cost burdens declined for the third straight year in 2013.  Last year, 39.6 million households spent more than 30 percent of their income on housing, down from 40.9 million in 2012 and a peak of 42.7 million in 2010.  Still, just over a third of U.S. households (34 percent) were cost burdened in 2013, including about a quarter of all homeowners (26 percent) and half of all renters (49 percent) (Figure 1).

Notes: Moderate (severe) burdens are defined as housing costs of 30-50% (more than 50%) of household income. Households with zero or negative income are assumed to have severe burdens, while renters paying no cash rent are assumed to be without burdens.

Source: JCHS tabulations of US Census Bureau, American Community Surveys.

Last year’s decline in the number of cost-burdened households, however, occurred almost exclusively among homeowners.  Nearly 19 million owners were cost burdened in 2013, down from 20.3 million in 2012.  The number of owners with severe cost burdens – paying more than 50 percent of income for housing – also slid, from 8.5 million in 2012 to 8.1 million in 2013.  The easing of owner cost burdens is due in part to a dramatic decline in median homeowner housing costs.  After surging during the housing bubble, inflation-adjusted owner costs have dropped to about 2.5 percent below their 2001 level (Figure 2).  Owner burdens are also down due to a significant reduction in the overall number of homeowners –  fully 294,000 fewer households in 2013 than 2012.  This decline in the number of homeowners for the third straight year (and the fifth time since 2007) suggests that many burdened owners dropped out of ownership, moving into the costly rental market.

Notes: Median costs and incomes are real  values adjusted using the CPI-U for All Items. Owner housing costs are first and second mortgage payments, property taxes, insurance, homeowner association fees, and utilities. Renter housing costs are cash rent and utilities.
Source: JCHS tabulations of US Census Bureau, American Community Surveys.

With many exiting ownership and new households forming, the number of renter households was up by 615,000 in 2013.  Indeed, a major reason why renter cost burdens remain persistently high is that the overall number of renters continues to grow.  Despite a slight decline in cost-burdened share, the sharp growth in renter households pushed the number with cost burdens up for the twelfth consecutive year, reaching 20.8 million in 2013.  Of these, about 11.2 million were severely burdened in both years.  Cost pressures also continue to drive burdens higher as over the past decade, renter costs have largely gone up, while renter incomes have declined.  As Figure 2 shows, real median renter costs in 2013 were about five percent higher than in 2001 while, even with modest income gains in 2013, median incomes were nearly 11 percent lower.  If past patterns hold and income growth remains stagnant, rental costs continue to climb, and affordable ownership stays out of reach, rental cost burdens will only continue to grow.

With More than 2 Million Units at Risk, How Can the U.S. Preserve its Affordable Rental Housing Stock?

by Irene Lew
Research Assistant

As our most recent State of the Nation’s Housing report confirms, the renter affordability crisis shows no signs of abating, with more than one in four renters spending over 50 percent of their income on housing in 2012. With the Great Recession pushing up the number of very low-income households that qualified for rental assistance by 3.3 million between 2007 and 2011 (a 21 percent increase), the number of available subsidized rental units has not kept pace—the share of eligible households able to secure aid dropped from 27 percent to 24 percent over this period.

Given the growing demand for subsidized rental housing, preserving the existing stock of affordable housing has become critical. In our report, we analyzed data from the National Housing Preservation Database to determine what types of federally subsidized units with assistance tied to them are particularly vulnerable to loss over the next decade, due to expiring contract or affordable-use restrictions. (The other two primary forms of assisted housing are public housing developments and units rented in the private market using Housing Choice Vouchers.)

Using the database, we determined that contracts or affordable-use restrictions for more than 2 million federally assisted rental units will expire between 2014 and 2024. This amounts to 43 percent of federally subsidized units. Rental units subsidized through two programs—the Low-Income Housing Tax Credit (LIHTC) program and HUD-funded project-based rental assistance—represent 85 percent of housing with expiring contracts or affordability restrictions (see Figure 33). Project-based rental assistance includes Project-based Section 8, as well as Project Rental Assistance Contracts (PRACs) that provide rental assistance to low-income older adults and those with disabilities. 

Over half (57 percent) of the units with expiring restrictions in the coming decade are subsidized through the LIHTC program, while those with project-based rental assistance account for 28 percent. Units in properties supported by HOME funding and those subsidized with USDA Section 515 Rural Rental Housing Loans represent 9 percent, while another four percent are in properties with FHA mortgage insurance, and the remaining 3 percent are subsidized through older HUD programs.

Units in properties subsidized with project-based rental assistance are vulnerable to being removed from the affordable stock because these programs are subject to annual Congressional appropriations, which have continued to decline. The Senate Appropriations Committee’s recent approval of the Fiscal Year 2015 Transportation-HUD Appropriations Bill included a $200 million reduction in project-based rental assistance from the Fiscal Year 2014 enacted level. These budget cutbacks come on the heels of sequestration, which reduced the amount of available funding for project-based rental assistance contracts and forced HUD to short-fund thousands of contracts in 2013 to prevent them from expiring. Short-funding refers to the practice of partially funding renewals in the form of yearly contracts, thereby deferring ongoing costs to future fiscal year budgets in order achieve cost savings today. However, this practice creates uncertainty for owners by adding more complexity to ongoing property financing and operations.

With short-funding becoming so common for the project-based assistance program, over half of the 596,000 units with contracts expiring over the next decade will come up for renewal in 2014 and 2015 alone.  As federal funding becomes more uncertain and HUD struggles to fund existing project-based contracts, fewer owners who are eligible for contract renewals may decide that it is feasible to continue to rent to low-income households, increasing the likelihood that these properties may leave the affordable rental housing stock. And should budget shortfalls continue, HUD may have no choice but to allow some project-based rental assistance contracts to expire even if the owners want to remain in the program.

Meanwhile, units in properties subsidized through the LIHTC program are less vulnerable to removal from the affordable stock, although they represent the lion’s share of units with affordability periods expiring over the next decade. Between 2014 and 2024, approximately 1.2 million LIHTC units will reach the end of their 15- or 30-year mandatory affordability period and are eligible to leave the program. Owners of these properties have three options: apply for another round of tax credits, maintain the property as affordable housing without new subsidies, or convert the property to market-rate housing. For the most part, according to a 2012 HUD report, LIHTC properties that reached the end of their required 15-year affordability period continue to operate as affordable housing without new subsidies. These properties remain affordable without new subsidies for several reasons: they obtain a nonprofit sponsor with a long-term commitment to continuing affordability, they have project-based subsidies such as Section 8 that the owner does not want to give up, and/or the LIHTC rents vary little from market rents. Properties at higher risk for conversion to market-rate housing tend to be owned by for-profit owners in high-cost markets.  While the LIHTC program is not subject to annual appropriations, it could be endangered by comprehensive tax reform that would take a close look at these types of tax expenditures. But given the importance of the LIHTC program in both new production and preservation of affordable rental housing, it does have broad political support.

Given the gap between the demand for rental assistance and the number of assisted units available, there is a clear need for greater efforts to both preserve and expand affordable rental housing developments. Preservation initiatives such as HUD’s Rental Assistance Demonstration (RAD) help ensure that approximately 16,100 rental units in privately-owned properties subsidized through older project-based assistance programs (Rent Supplement and Rental Assistance Payment) remain affordable even after their nonrenewable contracts expire. Yet, RAD only addresses a small part of the growing need for preserving such housing.

Meanwhile, promising large-scale initiatives such as the National Housing Trust Fund have stalled due to lack of funding. Signed into law in 2008 as part of the Housing and Economic Recovery Act, the fund is a permanent program not subject to annual appropriations and has the potential to preserve a substantial share of federally assisted rental housing while also adding new affordable units. The fund was also the first new production program targeted to households with extremely low incomes since the creation of the Section 8 program in 1974. Unfortunately, the program remains unfunded to this day. Initially, it was to be financed with contributions from the GSEs, but these contributions were suspended indefinitely once Fannie Mae and Freddie Mac were taken over by FHFA in 2008. Most proposals for GSE reform, including the Johnson-Crapo bill making its way through the Senate, include some provision to fund affordable housing, but it remains unclear when Congressional action will occur, and what form, if any, the final legislation will provide for affordable rental housing.    

Rental Supply is Catching up with Strong Demand, but not for Affordable Units

by Elizabeth La Jeunesse
Research Assistant

The Joint Center’s new State of the Nation’s Housing report summarizes ongoing and emerging trends in U.S. rental markets.  Foremost among these is the strength of demand for rental housing, which continued to soar in 2013 albeit at a slower pace relative to recent years.  Indeed, from 2005 to 2013, the U.S. saw a net increase of around 740,000 renter households per year.  This far exceeds historical renter household growth of around 410,000 per year on average from the 1960s through the 2000s.

With rental demand soaring, supply of multifamily rental units—which house over 60 percent of all renter households—did not keep up.  In 2009, for example, construction began on just 109,000 multifamily units.  According to apartment data from MPF Research, demand exceeded new additions to supply by nearly 200,000 units during 2010, and by 170,000 units in 2011.  Rental markets tightened as a result of this excess demand.  Rents rose, occupancy rates climbed to 95 percent for professionally managed apartments, and rental property values reached new peaks. 

But as of 2012, supply picked up and demand eased, bringing the two closer in line with each other (see Figure 5, from our report below).  Indeed, that year demand for apartments outpaced supply by only 21,000 units.  Last year the two measures came even closer into alignment.  Completions of new, professionally managed apartment units reached 163,000 in 2013, marginally exceeding the increase in the number of occupied units.  In other words, supply and demand lined up fairly evenly. (Click charts to enlarge.)

Relative equilibrium also became evident in a slight easing of rent pressures.  Indeed, growth in rents for professionally managed units lowered to a still-healthy rate of around 3.0 percent on average in 2013, down from 4.0 percent two years earlier.  Growth in net operating income for owners of large apartments moderated to 3.1 percent in 2013, down from between 6 and 11 percent in 2011-12 according to data from the National Council of Real Estate Fiduciaries.  The annual rate of return on rental property investment likewise lowered to a more modest but sustainable 10.4 percent, about the same as in the ten years preceding the housing bubble and bust (1995-2004).

While supply of multifamily units rebounded at the national level, the story is more varied across metro areas.  In over half of the nation’s largest metro areas, the volume of permits for new multifamily units in 2013 remained below last decade’s average.  For example, previously booming metros including Las Vegas, Chicago, Atlanta and Phoenix all saw permitting decline by 25 percent or more compared to levels seen between 2000 and 2009 (see Figure 25, from our report) Yet several metros in Texas, as well as Denver, Seattle, Los Angeles, and Washington D.C. registered growth relative to that boom period.  Demand would need to remain strong in such areas to absorb this future supply.

Not all segments of the market are in balance either.  Demand for units affordable to low-income renters and families far exceeds the supply of available units.  An Urban Institute analysis indicates that in 2012, 11.5 million extremely low income households competed for just 3.3 million affordable, available units.  This suggests a supply gap of 8.2 million units needed to house extremely low-income renter households, up from a gap of 5.2 million units ten years earlier.  Lack of affordable, available housing often requires struggling households to pay excessive shares of their income on housing, reducing the money they have left over to buy other goods and services, such as food and healthcare.

As Daryl Carter, Chairman of the National Multifamily Housing Council, pointed out during the webcast release of our new report, greater attention needs to be focused on the types of units being built to ensure that they meet the affordability and sizing needs of today’s renter households. These include not only low income households, but also an increasing number of families with children, a group who saw particularly steep declines in homeownership rates since the Great Recession.  Panelists on the webcast also emphasized the importance of federal rental assistance measures to address the undersupply of affordable units, as well as steps local communities and developers can take.  These include relaxing zoning rules to allow more residential construction and tying affordable housing plans to development projects at the local government level.

Millennials the Key to a Stronger Housing Recovery

The U.S. housing recovery should regain its footing, but also faces a number of challenges, concludes The State of the Nation’s Housing report released today by the Joint Center. Tight credit, still elevated unemployment, and mounting student loan debt among young Americans are moderating growth and keeping millennials and other first-time homebuyers out of the market.

The housing recovery is following the path of the broader economy.  As long as the economy remains on the path of slow, but steady improvement, housing should follow suit.

Although the housing industry saw notable increases in construction, home prices, and sales in 2013, household growth has yet to fully recover from the effects of the recession. Young Americans, saddled with higher-than-ever student loan debt and falling incomes, continue to live with their parents.  Indeed, some 2.1 million more adults in their 20s lived with their parents last year, and student loan balances increased by $114 billion.

Still, given the sheer volume of young adults coming of age, the number of households in their 30s should increase by 2.7 million over the coming decade, which should boost demand for new housing. Ultimately, the large millennial generation will make their presence felt in the owner-occupied market, just as they already have in the rental market, where demand is strong, rents are rising, construction is robust, and property values increased by double digits for the fourth consecutive year in 2013.

One key to realizing the millennials’ potential in the housing market is for the economy to grow to the point where their incomes start to rise. Another important factor is how potential GSE reform will affect the cost and availability of mortgage credit for the next generation of homebuyers, which will be the most diverse in the nation’s history. By 2025, minorities will make up 36 percent of all US households and 46 percent of those aged 25–34, thus accounting for nearly half of the typical first-time homebuyer market.

The report, as well as an interactive map released by the Joint Center, also highlights the ongoing affordability challenge facing the country, as cost burdens remain near record levels and over 35 percent of Americans spend more than 30 percent of their income for housing. The situation is particularly grim for renters, where 50 percent are cost burdened and 28 percent are severely cost burdened (meaning they spend over half of their income for housing).

Click map to launch; may take a few seconds to load.

When available, federal rental subsidies make a significant difference in the quality of life for those struggling the most.  Between 2007 and 2011, the number of Americans eligible for assistance rose by 3.3 million, while the number of assisted housing units was essentially unchanged. Sequestration forced further cuts in housing assistance, which have yet to be reversed.

The U.S. Rental Crisis: HUD Secretary Keynote & A New Tool from the Urban Institute

At a recent event in Washington, DC, the Joint Center released its biennial America's Rental Housing report. Shaun Donovan, U.S. Secretary of Housing and Urban Development, delivered a keynote about the issue of rental affordability in the U.S, which he called a "silent crisis" as America's lowest income renters have seen their incomes steadily go down while their rents steadily go up.  Watch Secretary Donovan’s keynote below.

Further illustrating the points made in our report, and by Secretary Donovan, the Urban Institute this week released an interactive map, showing the gap in affordable housing in the U.S. Nationally, for every 100 extremely low-income renter households, there are only 29 affordable and available units. Explore the Urban Institute's map to see the situation in your area.

Housing Finance and Tax Reform Can Expand Affordable Rental Options

by Bill Apgar
Senior Scholar

Today, when more than one in three American households live in rental housing, ongoing erosion in renter incomes combined with ever rising rents has pushed the number of renter households paying excessive shares of income for housing to record levels.  Unfortunately, efforts to expand the supply of affordable rental housing remain mired in congressional wrangling over budget deficits and failure to reach consensus over how best to reform the nation’s housing finance sector. Although proposed changes to the single-family mortgage sector have captured most of the headlines, equally important reforms are now being discussed that will fundamentally alter the regulation of multifamily housing finance, including the operations of the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs), as well as tax and subsidy mechanisms to expand affordable rental housing options through the Low Income Housing Tax Credit (LIHTC), public housing, and rental assistance programs.

As I discussed in my recent research brief, The Changing Landscape for Multifamily Finance, tax reform can play an important role in balancing the national budget and reducing the national debt. But in seeking to create a path forward, Congress should be careful not to short circuit tax expenditures that reduce the cost of capital for multifamily rental production and that enable developers to offer units at rents affordable to lower-income households. As one of the nation’s largest corporate tax expenditures, however, LIHTC is vulnerable to elimination or substantial cuts to help pay for lower corporate tax rates or any one of several deficit-reduction proposals now under consideration.

Supporters argue that LIHTC is a premier example of a successful public-private partnership. When combined with housing vouchers or other forms of rental assistance, the tax credit plays an important role in providing decent housing that is affordable to the nation’s poor. Opponents, however, counter that LIHTC’s complex rules scare away many financially-motivated private developers.  Moreover, critics contend that all too often LIHTC’s benefits go to moderate-income, as opposed to the nation’s lowest income, renters.

To improve the program’s ability to assist a broader range of renters, it is important to expand the ability of developers to combine LIHTC resources with housing vouchers or other tenant-based subsidies.  Currently, LIHTC requires developers to meet one of two standards: either 20 percent of units must be rent-restricted and occupied by tenants with incomes less than 50 percent of area median income (AMI).  Alternatively, at least 40 percent must be rent-restricted and occupied by tenants with incomes less than 60 percent of AMI. For this purpose, “rent-restricted” means that the tenant pays no more than 30 percent of their monthly income on rent. 

In practice, these criteria have led to multifamily housing developments that serve a very narrow band of tenants with incomes falling between 40 and 60 percent of AMI.  One proposal to extend the reach of the LIHTC program to serve more of the nation’s lowest income renters would require LIHTC developments to serve a larger share of households with incomes less than 40 percent of AMI while limiting the number of residents earning more than of 80 percent of AMI living in LITHC developments.  Another would award additional project-based housing vouchers to developments that have at least 30 percent of units occupied by tenants with incomes of less than 30 percent of AMI.  

Similarly, efforts to reform FHA and the housing GSEs must link access to government guarantees to requirements that a substantial portion (say, 60 percent) of the total rental housing units in developments are affordable to households earning 80 percent or less of AMI.   Such proposals would encourage developers to more aggressively search out available rental assistance options, and in doing so widen the income band of residents able to affordably live in LIHTC and other rental housing developments. Mixed-income buildings that offer rental housing options serving a broad range of incomes are especially important in low income communities that are being revitalized and/or are located in sparsely populated areas. These proposals could be structured to be revenue neutral, but would be enhanced by increasing the funding for housing vouchers and other rental assistance efforts

In another recent effort to harness private capital to expand the supply of affordable housing, HUD’s Rental Assistance Demonstration (RAD) program was designed to stem the loss of public housing and certain other at-risk, federally assisted properties. The program allows owners to pledge a portion of cash flow derived from existing long-term, project-based Section 8 contracts as collateral to support public and private lending to make much-needed improvements. At a time when the backlog of public housing repairs stands at $25.6 billion and other federally assisted properties have yet to recover fully from the Great Recession, RAD helps both public and private owners of multifamily housing address critical rehabilitation needs by borrowing against their future income streams on the private market. 

Market fundamentals suggest that the multifamily finance sector should remain strong in the near term. Coordination of rules governing utilization of existing long-term, project-based Section 8 contracts with ongoing GSE and tax policy reform efforts could unleash private sector expertise to serve broader segments of today’s renters. This would help turn the energy of the multifamily finance sector toward reducing the rental cost burdens that undermine the well-being of millions of US households. 

Energy Cost Burdens in Rental Housing

by Michael Carliner
Fellow

The recent Joint Center report, America's Rental Housing: Evolving Markets and Needs, reiterates the extent of severe cost burdens faced by renters, especially those with low incomes.  A research brief I prepared in connection with the report documents the large share of the cost of rental housing attributable to the cost of energy, particularly for low-income renters.

Among renters who pay for all utilities, payments for energy represented a median of 13 percent of gross rents (rent plus utilities).  Energy expenses are nearly as high for low-income renters as for high-income renters, and consequently account for larger share of gross rents and of incomes for those with low incomes. Median monthly energy expense for those paying all utilities in 2011 was $116 for those with annual incomes of less than $15,000, compared to $151 for renter households with incomes over $75,000 (Figure 1).  This partly reflects the fact that energy use is a necessity, but it is also due to lower energy efficiency in the housing occupied by low-income renters.

(Click chart to enlarge)

Values shown for income, expenses, and energy use are medians
Source: American Housing Survey 2011

About a quarter of renters have some or all of their utilities included in their rent. For those renters, the cost of energy may not be visible, but it represents a major component of the operating cost for their housing, and tenants ultimately pay that cost with their rents.  Even where renters pay directly for energy used within their individual units, energy costs for common areas and facilities are a substantial component of the operating cost for the property and are reflected in rents. Among all multifamily rental properties, payments for energy by property owners represent about 9 percent of rent receipts.

Rental housing generally uses more energy, relative to living area, than owner-occupied housing. Newer homes are generally more energy-efficient than older ones.  Energy use per square foot is particularly high among the nearly 7 million multifamily rentals built before 1960 (Figure 2).  There has been substantial investment in older owner-occupied housing over the years to improve efficiency, but not as much for multifamily rentals.  Older single-family rentals, many of which were owner-occupied in the past, use less energy per square foot than older multifamily rentals, but still use more energy per square foot than owner-occupied single-family homes.

Data in thousands of BTUs
Source: DOE Energy Information Administration, 2009 Residential Energy Consumption Survey

For the majority of renters who directly pay for the energy used in their homes, the amount used reflects the quality of insulation in the structures and on the efficiency of the equipment. Efficiency depends on investments made by the owners of the properties, who may not be motivated to invest in efficiency improvements if they don't pay the bills for usage.  This separation between investment decisions and usage costs has been described as a "split incentive" situation and is a central issue in renters' energy costs. Another type of split incentive arises when the owner pays the bills but the tenant controls the temperature and the lights.

My research brief discusses several policy options for overcoming the split incentive problem where the tenants pay for utilities.  These include regulations mandating energy efficiency and subsidies for investments in efficiency.  The most promising approach, however, may be to make energy efficiency more transparent, so that renters can easily anticipate energy cost in choosing where to live.  If that makes occupancy rates and rental income more dependent on efficiency, property owners would have a greater incentive to invest in efficiency.  Several localities have recently established requirements for benchmarking and disclosing energy expenses in rental properties, providing a test of whether that will lead to an easing of renters' energy cost burdens.

Split incentive problems are not the only source of energy inefficiency and excessive energy cost burdens in rental housing.  The research reported in the brief, and earlier research cited there, indicates that in rental properties with utilities included in the rent, where the owner has a greater incentive to invest in efficiency, insulation quality and equipment efficiency is not consistently better than in rentals where the tenant pays for utilities, once variables such as regional climate and age of the structure are accounted for.  Whether or not utilities are included in the rent, rental housing does not generally include efficiency characteristics comparable to owner-occupied housing.  Other factors are evidently also involved.  The paper suggests, for example, that the financial resources of rental property owners may be a constraint.  Moreover, government programs such as the DOE Weatherization Assistance Program are designed in such a way that assistance goes primarily to owner-occupied housing, even though the low-income households that are the intended beneficiaries are mostly renters.

American Renters Face Severe Affordability Problems: Live Webcast Monday, December 9

by Kerry Donahue Communications Manager Affordability problems for American renters have skyrocketed over the past decade, both in number and the share of renters facing them.  The inability of so many to find housing they can afford dramatically impacts the health and well-being of renters, as lower-income households cut back on food, healthcare, and savings, just to keep up. Our new report, America’s Rental Housing: Evolving Markets and Needs, will be released next Monday December 9 in Washington, DC.  The daylong event will feature a keynote address from HUD Secretary Shaun Donovan as well as remarks by Colorado Governor John Hickenlooper, Senator Mark Warner of Virginia, and many others.  The event will be webcast live from 11:30 a.m. – 4:30 p.m. (Eastern) at www.jchs.harvard.edu.    This new report on America's rental housing finds that half of U.S. renters pay more than 30 percent or more of their income on rent, up an astonishing 12 percentage points from a decade earlier. Much of the increase was among renters facing severe burdens (paying more than half their income on rent), boosting their share to 27 percent. These levels were unimaginable just a decade ago, when the share of Americans renters paying half their income on housing, at 19 percent, was already a cause for serious concern. Tune into the webcast on Monday for more findings from this new report.

AGENDA  (Watch the LIVE WEBCAST @ www.jchs.harvard.edu)
Monday, December 9, 2013  (Eastern time, subject to change)

11:00 a.m. Welcome Eric S. Belsky, Managing Director, Harvard Joint Center for Housing Studies Mijo Vodopic, Program Officer, John D. and Catherine T. MacArthur Foundation 11:10 a.m. Keynote Address The Honorable Shaun Donovan Secretary, U.S. Department of Housing and Urban Development 11:35 a.m. America’s Rental Housing 2013 Research Presentation Chris Herbert Research Director, Harvard Joint Center for Housing Studies 12:30 p.m. Remarks Michael Stegman Counselor to the Treasury Secretary for Housing Finance U.S. Department of the Treasury 1:00 p.m. CONVERSATION: Future Directions in Assisted Housing Chris Arnold, Correspondent, National Public Radio (moderator) Erika Poethig, Fellow and Director of Urban Policy Initiatives, Urban Institute Mark Calabria, Director of Financial Regulation Studies, CATO Institute 2:00 p.m. Housing Finance Reform & Multifamily Lending   The Honorable Mark Warner U.S. Senator, Commonwealth of Virginia 2:30 p.m. Break 2:45 p.m. CONVERSATION: The Evolution of the Rental Housing Market Nick Timiraos, Reporter, Wall Street Journal (moderator) Thomas Bozzuto, Chairman and CEO, The Bozzuto Group Sean Dobson, Chairman and CEO, Amherst Securities Group Shekar Narasimhan, Managing Partner, Beekman Advisors 4:00 p.m. Remarks   The Honorable John Hickenlooper  Governor of Colorado This event will be WEBCAST LIVE at www.jchs.harvard.edu, and you can join the conversation on Twitter with #RentalHousing