Historically, it has been true in most cases that renting was more affordable than owning. Even in recent years when housing has been extremely affordable – in many markets making it cheaper to own than rent – there have been some major advantages to renting in terms of mobility and ease of access to housing. However, according to a new report from the Harvard Joint Center for Housing Studies (HJCHS), rental affordability issues have “skyrocketed over the past decade both in number and the share of renters facing them,” ultimately affecting “the health and well-being of U.S. renters”. According to the study, half of U.S. renters pay nearly a third (30 percent) of their income on rent, up 12 points from the numbers in 2003. When a similar study was conducted in 2003, many analysts were concerned that renters were paying just 19 percent of their income.
The source of higher rents is simple: greater demand and limited supply. At this point in time, 35 percent of all Americans are renting their homes rather than purchasing them, thanks in large part to the housing crisis that left many would-be homeowners without the credit scores or down payments necessary in order to obtain a home loan. Although developers are, in many markets, throwing up new rental developments as quickly as possible, the enormous demand for rental housing is making it hard to keep up and resulting in climbing rents even in markets with many rental options. Median rents have increased nationally by six percent since 2000 and, to make matters more difficult for renters, the median income of renters has dropped by 13 percent. “More than ever before, the private market [is struggling] to provide decent housing that is affordable for people of even modest means,” reported the National Mortgage Professional Magazine in response to the study.
Shaun Donovan, head of the U.S. Department of Housing and Urban Development (HUD), called the state of the rental market “the worst affordability crisis this country has known,” adding that “Americans with worst-case housing needs….are paying more than half of every dollar they earn for housing.” To make matters even harder for many of these individuals, they also tend to be younger Americans with sky-high student loan debts that are likely to make buying a home difficult to impossible for quite some time. “You add in…higher student debt for many people…incomes for low- and moderate-income people have not been going up as fast as inflation, and you have a situation where it’s going to be very difficult to buy homes,” said HJCHS director Eric Belsky. However, he added, “the will toward homeownership remains there,” noting that 19 out of 20 people under 30 surveyed in the study said that they intend to buy a house at some point in the future.
For now, while the housing market offers low prices on single-family homes that many would-be buyers simply cannot afford, institutional investors are moving in to fill the gap. In many large, metro markets, investors making cash purchases account for around half of all home purchases. Most of these properties are being bought with the intent to hold and rent them out or for sale to another investor who will act as a landlord. While the single-family rental market could ease the pressure on multifamily housing and possibly bring rents down over time, with such a large – and growing – rental population, it seems unlikely that rents will fall anytime soon. Rick Judson, chairman of the National Association of Home Builders (NAHB), notes that this is not entirely bad for the economy or even the renters themselves, since construction jobs play a huge role in any recovery. In a public response to the HJCHS report, Judson noted that it is “of primary important…to ensure that rental housing can continue to be built and preserved.” Judson added that “the Harvard study…emphasizes the importance of the Low Income Housing Tax Credit (LIHTC), the premier financing tool for the construction of affordable rental housing, and warns of the dangers in eliminating or curtailing this program. The LIHTC is a federal tool intended to “increase the supply of affordable housing in…communities” by offering tax incentives to developers who build such housing. These credits may be used by the developer or sold to investors in order to raise capital for projects. Since this program makes financing easier for builders, it is not surprising that the NAHB would support its maintenance and growth.