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2020 Real Estate Update from Harvard University

February 24, 2020 | By: Betterturnkey | 0

Despite slowing demand and the continued strength of new construction, rental markets remain extremely tight. Vacancy rates are at decades-long lows, pushing up rents far faster than incomes. Both the number and share of cost-burdened renters are again on the rise, especially among middle income households. These conditions reflect fundamental market changes since the recession, including an influx of higher income households, constraints on new supply, and substantial losses of low-cost rentals.

With only limited federal support, state and local agencies are doing what they can to expand the affordable housing supply. What is needed, however, is a comprehensive response from all levels of government to address the scale of the nation’s rental affordability crisis.

STRONG DEMAND FROM HIGH-INCOME RENTERS After more than a decade-long runup, renter household growth appears to have plateaued. By the Housing Vacancy Survey’s count, the number of renters fell by a total of 222,000 between 2016 and 2018, but then more than made up for this lost ground with a gain of 350,000 through the first three quarters of 2019. At the same time, however, the number of high-income renters continued to climb, increasing by 545,000 in 2016–2018 alone. In fact, households with real incomes of at least $75,000 accounted for over three-quarters of the growth in renters (3.2 million) from 2010 to 2018, while the number earning less than $30,000 fell by nearly 1 million (Figure 1). This represents a sharp reversal of trends in the 2000s, when low-income households drove 93 percent of renter growth and the number of high-income households declined by 160,000. This shift has significantly altered the profile of the typical renter household. When rentership rates hit bottom in 2004 during the homeownership boom, 18 percent of renters earned $75,000 or more and 42 percent earned less than $30,000.

By 2018, this disparity had narrowed considerably, with high-income households accounting for 23 percent of renters and low-income households for 38 percent. Renting has also become much more common among the age groups and family types traditionally more likely to own their housing. According to the Housing Vacancy Survey, between the onset of the homeownership boom in 1994 and the first three quarters of 2019, rentership rates were up 4.5 percentage points among households aged 35–44 and 5.3 percentage points among households aged 45–54. Even among households aged 55–64, the renter share increased 4.2 percentage points over this period. Meanwhile, from the homeownership peak in 2004 to 2018, the number of married couples with children that owned homes fell by 2.7 million, while the number renting rose by 680,000. These changes have meant that families with children now make up a larger share of renter households (29 percent) than owner households (26 percent). The increase in renting among high-income, older, and larger households reflects fundamental shifts in the composition of demand.

Public opinion surveys indicate that most renters are satisfied with their current housing situations, but still desire to eventually own homes. However, these same surveys also point to affordability as a major barrier to homeownership. Consistent with this finding, nearly all of the net growth in homeowners from 2010 to 2018 was among households with incomes of $150,000 or more.

NEW CONSTRUCTION FOCUSED ON THE HIGH END New rental construction remains near its highest levels in three decades. Despite the slowdown in demand, multifamily starts rose 6 percent in 2018 to 374,100 units—the third-highest total since the late 1980s. Production in 2019 is set to match or even exceed that number.

Nearly all new multifamily units are built as rentals, with a growing share in larger buildings intended for the high end of the market. Indeed, the share of newly completed apartments in structures with 50 or more units increased steadily from 11 percent on average in the 1990s, to 27 percent in the 2000s, to 61 percent in 2018. The share of new apartments that include amenities such as air conditioning and an in-unit laundry has also grown to a large majority. As a result, the median asking rent for unfurnished units completed between July 2018 and June 2019 was $1,620—some 37 percent higher, in real terms, than the median for units completed in 2000. About one in five newly built apartments had an asking rent of at least $2,450, while only 12 percent had asking rents below $1,050.

The unprecedented growth in demand from higher-income renters clearly contributed to the shift in new construction toward more expensive apartments. But the rising costs of housing development are also a key factor—particularly the soaring price of commercial land, which doubled between 2012 and mid-2019. The RLB Construction Cost Index, which captures the cost of labor, materials, contractor fees, and local taxes, also jumped by 39 percent over this period, or three times the rise in overall consumer prices. With these steep increases in development costs, it is no surprise that rents for new units are so high.

DWINDLING SUPPLY OF LOW-COST RENTALS Rents have been on a remarkable uptrend. Between 2012 and 2017, the number of units renting for $1,000 or more in real terms shot up by 5.0 million, while the number of low-cost units renting for under $600 fell by 3.1 million (Figure 2). Meanwhile, the supply of units with rents in the $600–999 range also declined, but by a more modest 450,000. This marks a sharp departure from the preceding five-year period, when the number of units in all three segments grew by 1.2–1.8 million. The decline in low-cost units brought their share of the national rental stock down from 33 percent in 2012 to just 25 percent in 2017, with decreases in all 50 states and Washington, DC. In fact, the largest declines in share were in states where rent levels are typically more affordable, including Iowa, Montana, Nebraska, North Dakota, Oklahoma, and Texas. At the same time, the largest increases in the share of units renting for at least $1,000 a month were in Colorado, Oregon, and Washington—states where household growth was particularly strong in 2012–2017. In high-cost markets such as California, Hawaii, Maryland, and New Jersey, more than 60 percent of units rented for at least $1,000 a month in 2017.

Several forces have contributed to the shrinking share of lower-cost rentals. Certainly, strong demand among high-income renters played a part, with increased competition from households of greater means driving up overall rents. The limited supply of new rental housing relative to demand also helped to keep vacancy rates for existing units low, further fueling rent growth.

CONTINUING TIGHTNESS NATIONWIDE Even as overall rental demand ebbs and new supply comes on line, tight conditions prevail across the country. The Census Bureau reports that the national rental vacancy rate edged down again in mid-2019 to 6.8 percent—the lowest level since the mid-1980s.

According to RealPage, vacancy rates for units in professionally managed properties were down in 118 of the 150 markets tracked, with year-over-year declines averaging 0.7 percentage point in the third quarter of 2019. Increases in the other 32 markets were modest, averaging just 0.4 percentage point. As a result, rental vacancy rates in 135 metros held below 5.0 percent in the third quarter, including 45 where rates were under 3.0 percent. Only 15 markets had vacancy rates of 5.0 percent or higher (including Houston, Oklahoma City, and San Antonio).

The increasing tightness of rental markets is also evident across quality segments (Figure 3). As CoStar data show, vacancy rates fell across the board in the years after the Great Recession as rental demand soared and new supply lagged. But with the surge in highend construction after 2012, vacancy rates at higher-quality properties hit 9.7 percent in 2018 before trending down again to 8.7 percent in the third quarter of 2019. Meanwhile, vacancy rates at moderate and lower-quality properties hovered just above 5.0 percent from 2015 to 2018, but also inched down in 2019.

With vacancy rates so low, rent gains continue to outrun general inflation. The Consumer Price Index for rent of primary residence was up 3.7 percent year over year in the third quarter of 2019, far outpacing the 1.1 percent increase in prices for all non-housing items. This brought the number of consecutive quarters of real rent growth to 29, the second-longest streak in records dating back to the 1940s. Indeed, real rents rose 27 percent over this seven-year period—four times faster than the prices of all other goods.

Rents are up in markets across the country. RealPage reports that apartment rents in 142 of 150 metros rose from the third quarter of 2018 to the third quarter of 2019. The metros with the largest year-over-year increases were in the South and West, with Las Vegas, Phoenix, and Wilmington (NC) posting rent gains that exceeded 7 percent.

RENTAL PROPERTY PRICES AT RECORD HIGHS Strong operating performance has propelled nominal apartment prices to new heights, up 150 percent between 2010 and the third quarter of 2019. But price gains did slow from 12.6 percent in mid-2018 to 7.6 percent in mid-2019—the first time in eight years that growth dipped below 8.0 percent. Nominal prices in a few major markets, such as Houston, Minneapolis, and Seattle, actually declined year over year amid weakening demand.

Even so, high property valuations and low interest rates continue to fuel multifamily financing activity. With interest rates edging down again in 2019, the multifamily mortgage originations index rose 16 percent year over year in the third quarter. According to MBA data, multifamily mortgage debt outstanding was at a new high of $1.5 trillion at that time. Government agencies are still the largest source of financing for multifamily loans. Fannie Mae and Freddie Mac provided capital for 42 percent of multifamily loan originations in 2018, or roughly $143 billion. Banks accounted for the next largest share of the market, backing 32 percent of originations or $108 billion. Although the numbers are not yet in, MBA predicts that healthy market conditions will make 2019 another record year for multifamily mortgage lending. However, the Federal Housing Finance Administration has tightened the caps on lending by Fannie Mae and Freddie Mac, which will put pressure on other players to step up participation.

Ownership of rental housing shifted noticeably between 2001 and 2015, with institutional owners such as LLCs, LLPs, and REITs accounting for a growing share of the stock. Meanwhile, individual ownership fell across rental properties of all sizes, but especially among buildings with 5–24 units. Indeed, the share of mid-sized apartment properties owned by individuals dropped from nearly two-thirds in 2001 to about two-fifths in 2015. Given that units in these structures are generally older and have relatively low rents, institutional investors may consider them prime candidates for purchase and upgrading. These changes in ownership have thus helped to keep rents on the climb.

PERSISTENT AND GROWING AFFORDABILITY CHALLENGES With the economy on sound footing and unemployment at its lowest level in decades, the number of cost-burdened renter households (paying more than 30 percent of income for rent and utilities) edged down from 2014 to 2017. But their numbers turned up again in 2018, rising by 261,000 to 20.8 million. This increase leaves the net decline in cost-burdened renters since 2014 at just over 500,000.

Thanks to strong growth in the number of high-income renters, the share of renters with cost burdens fell more noticeably from a peak of 50.7 percent in 2011 to 47.4 percent in 2017, followed by a modest 0.1 percentage point increase in 2018. Still, recent progress in limiting the spread of cost burdens came on the heels of a sharp deterioration in rental affordability over the preceding decade. In 2018, there were 6 million more cost-burdened renters than in 2001 and the cost-burdened share was nearly 7 percentage points higher

Meanwhile, 10.9 million renters—or one in four—spent more than half their incomes on housing in 2018. After several years of modest declines, the number of severely burdened households increased in 2018, by 155,000, reducing the total improvement since the 2014 peak to just 483,000. Some 72 percent of renters earning less than $15,000 annually were severely burdened, along with 43 percent of those earning $15,000–29,999.

But even as the overall share of cost-burdened renters has receded somewhat, the share of middle-income renters paying more than 30 percent of income for housing has steadily risen (Figure 4). The largest jump has been among renters earning $30,000–44,999 annually, with their cost-burdened share up 5.4 percentage points in 2011–2018, to 55.7 percent. The increase among households earning $45,000– 74,999 is nearly as large at 4.3 percentage points, to a share of 27.0 percent. While occurring across the country, the growing incidence of cost burdens among middle-income renters is most apparent in larger, high-cost metropolitan areas.

The spread of cost burdens up the income scale coincides with the ongoing decline in lower-cost rentals. While the improving economy has increased the share of middle-income renters, earnings growth has not caught up with the rise in rents. To meet the 30-percent-ofincome affordability standard, a household earning $30,000 a year would have to pay no more than $750 a month for housing costs, while a household earning $45,000 would have to pay no more than $1,125. As the stock of units charging such low rents continues to decline, it is increasingly difficult for households with modest incomes to find housing that is within their means.

INCREASES IN HOUSING INSTABILITY After paying rent each month, lowest-income households have little money left over for other necessities. The median renter earning less than $15,000 in 2018 had only $410 left each month for food, transportation, healthcare, and other basic needs, according to American Community Survey data. While middle-income renters are less constrained, they have lost considerable spending power over the last two decades as rents have climbed. In 2018, renters earning $30,000–44,999 had $2,010 left over each month for non-housing expenses—nearly 9 percent less per month than in 2001, or a total of $2,300 less over the course of a year.

And when households cannot afford to pay their rents, they face the risk of eviction. According to the 2017 American Housing Survey, 1.9 percent of renters reported being threatened with eviction over the previous three months. The share is especially high among renters making less than $30,000, with 2.7 percent reporting recent eviction threats.

Several local governments have instituted just cause eviction protections and universal access to legal counsel in an effort to reduce the number of actual evictions, as well as lower the costs of social services necessary to support families left homeless. Despite these tenant protections, however, homelessness is again on the rise. After falling for six straight years, the number of people experiencing homelessness nationwide turned up in 2016–2018, to 552,830. Much of this reversal reflects an 18,110 jump in the number of homeless individuals living outside or in places not intended for human habitation, with particularly large increases in the high-cost states of California, Oregon, and Washington. Amid this growing need, the federal homeless support system declined by about 2,200 beds in 2017–2018, marking the first decrease in at least 10 years.

Climate change poses yet another threat to the stability of renter households. The Joint Center estimates that 10.5 million renter households live in zip codes with at least $1 million in home and business losses in 2008–2018 due to natural disasters. Moreover, 8.1 million renter households report that they do not have the financial resources to evacuate their homes if a disaster strikes. While FEMA provided temporary housing assistance to 940,000 renters in 2013–2018, the growing risk of climate-related events demands a much greater response from government at all levels, including proactive planning that considers the vulnerabilities of low-income renter households.

RESPONSES TO THE RENTAL HOUSING CRISIS As the nation’s rental affordability crisis evolves, efforts to address these challenges must evolve as well. However, the federal response has not kept up with need. HUD budget outlays for rental assistance programs grew from $37.4 billion in 2013 to $40.3 billion in 2018 in real terms, an average annual increase of just 1.5 percent (Figure 5). The shortfall in federal spending leaves about three out of four of the 17.6 million eligible households without rental assistance.

Making matters worse, funding delays and the need for higher subsidies per household to keep up with rising rents reduced the number of HUD program recipients from 4.8 million in 2013 to 4.6 million in 2018. In rural areas, the number of households supported under USDA’s multifamily programs also fell from 413,090 to just 390,110 over this period, and many of the remaining subsidized units are at risk of loss from the affordable stock over the next 30 years.

State and local programs have attempted to fill these gaps in assistance by targeting low-income households without access to federal support. Chief among their efforts has been the issuance of $4.8 billion in tax-exempt bonds for multifamily housing in 2017–2018. Local governments have also passed reforms that mandate or incentivize new construction of affordable units, and 510 jurisdictions now have inclusionary zoning.

But with limited funds available for subsidies and rents on the rise, expanding the supply of market-rate rentals affordable to low- and middle-income households is also critical. To this end, many state and local governments have eased land use regulations to encourage production of lower-cost homes. For example, the City of Minneapolis and State of Oregon recently initiated sweeping reforms to allow construction of multiple units on lots previously zoned for single-family homes. In addition, at least 15 jurisdictions, including three states, now have ordinances that make it easier to build accessory dwelling units (ADUs) on the same lots as, or attached to, single-family homes. Other local strategies for encouraging multifamily construction include reduced parking requirements and streamlined permitting. Although effective on a small scale, these types of initiatives cannot begin to meet the needs of millions of cost-burdened renters.

THE OUTLOOK Rental market conditions have fundamentally changed since the Great Recession. With higher-income households accounting for much of the growth in demand since 2010, new supply has been concentrated at the upper end of the market. These new units typically offer amenities, including locations in the core parts of metro areas, that put their rents out of reach for even middle-income households. Meanwhile, rising demand, constricted supply, and changes in the ownership and management of existing rental properties—particularly smaller apartment buildings—have helped to reduce the stock of low- and moderate-cost units.

The fallout from these changes is substantial. In markets around the country, growing numbers of renters with incomes between $30,000 and $75,000 are now facing cost burdens. Meanwhile, nearly three-quarters of lowest-income renters spend over half of their incomes each month for housing, leaving little money for other basic needs, including food and healthcare. Not surprisingly, these conditions have also led to increases in homelessness, particularly in high-cost states.

Local governments have found themselves on the front lines of the rental affordability crisis. In response, many jurisdictions have adopted a variety of promising strategies to expand the affordable supply, including increased funding and reform of zoning and land use regulations to allow higher-density construction. Organizations ranging from hospitals and universities to tech companies have also started to address the crisis. Ultimately, though, only the federal government has the scope and resources to provide housing assistance at a scale appropriate to need.

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