Rental housing is a growing crisis according to the
Center for American Progress, but policymakers have made it "an afterthought in
the debate over the future of mortgage giants Fannie Mae and Freddie Mac." David M. Abromowitz, a Senior Fellow at the
Center, said that the U.S. housing market appears on the road to recovery but
any mention of a broad "housing recovery" ignores the far less rosy future of
roughly a third of the U.S. population, the 100 million people who rent.
Renters face a long-term and growing affordability
crisis. The demand for rental housing has
skyrocketed and production has failed to keep up. As a result rents have climbed 4 percent this
year while middle class wages have stalled and now one of every four renters
spends more than half their monthly income on housing. Rents are projected to increase by at least
another 4.6 percent next year and 4 percent in both 2014 and 2015.
The percentage of Americans who rent
is at the highest level since 1995; 1 million new renters were added in 2011
alone. Two major causes for the increase
are that both Baby Boomers and Millennials are entering ages likely to rent and
household formation is growing again after the recession. Over one million new households formed in the
12 months ending in September 2012.
Foreclosures have changed millions
of families from homeowners to renters, especially among the working class and
in communities of color. According to the San Francisco Federal Reserve, it
could take more than a decade for many of these families to return to
homeownership, so they have no option but to rent. Finally, tight lending
standards make mortgage credit less accessible than at any time in the recent
past. This is paradoxical given how
affordable owning a home is today.
While the number of low-income
renters grew by 2.2 million over the past decade, Harvard's Joint Center for
Housing Studies says the number of adequate and affordable rental units
actually decreased and analysts project that the current pace for rental
construction will fall well short of what is needed to meet demand between now
and 2015. Freddie Mac notes there will
be a net 1.7 million new renters between 2011 and 2015, but only about 200,000
new multifamily units per year. The
numbers could increase even faster over the following five years, with perhaps
as many as 2.3 million new renters added between 2015 and 2021. The
result will be an increasingly tight rental market and higher rents for many
Abromowitz notes that even though
there is a glut of vacant single-family homes, most the result of foreclosure,
converting them to rentals will only help certain groups of renters. Many are located in outlying suburbs or in
overbuilt markets and others are in economically distressed areas with little
housing demand because there are no jobs. The populations driving the demand
for rentals, downsizing seniors, young adults, and immigrant families forming
new households, are more likely to want rentals in larger multifamily buildings
or in urban areas and areas where jobs are plentiful.
This mismatch of supply and demand have forced
rents up and vacancies to fall from 8 percent at the end 2009 to 4.7 percent in
the second quarter of 2012. Meanwhile
wages for the vast majority of workforce renters remain fairly stagnant. Fifty-three percent of renters now pay more
than 30 percent of their income for housing, while 27 percent of renters pay
more than half.
When households spend so much for
rents it depresses demand for other goods and services. One analysis found that
housing-cost burdened families spend 50 percent less on clothes and health
care, 40 percent less on food, and 30 percent less on insurance and pensions
compared to families in affordable units.
Abromowitz says we are reaching a
crossroads in multifamily housing policy. Many of the roughly 4 million
apartment units built during the 1970s and early 1980s under a variety of Nixon-era
federal programs are nearing or at the end of their subsidy periods, leaving
many lower-income tenants at risk for sharp rent hikes. Affordability
restrictions on another 1 million apartments produced under the low income
housing tax credit program will also soon expire. These nearly 5 million
apartments represent roughly 15 percent of the nation's apartment stock.
In addition to direct subsidy
programs, the federal government has long supported a multifamily housing
market through Fannie Mae, Freddie Mac, (the GSEs) and the Federal Housing
Administration. Specifically, the GSEs purchase and guarantee conforming
multifamily mortgage loans, package those loans into pools and sell the
resulting mortgage-backed securities (MBS), to outside investors. They also hold some multifamily loans in
their own portfolios.
In good economic times, Fannie and
Freddie tend to back a smaller portion of the multifamily market because
private lenders and investors are eager to invest. In bad times however Fannie
and Freddie step in to keep the rental market afloat. Most recently, as private
investors fled the housing market in 2007 and 2008, the GSEs share of the
multifamily market shot up to fill the gap, and then eased back.
Without government-backed credit for
multifamily mortgages, the rental market would have completely collapsed. In 2009 Fannie and Freddie facilitated 85
percent of all multifamily loans, tripling their share of the multifamily loan
market from two years earlier. They continue in this rule, supporting 57
percent of multifamily loans in 2011.
Even with this support multifamily
unit construction dropped from 284,000 starts in 2008 to 109,000 in 2009, a
near 30-year low. Without government backing to attract private capital it is
likely that many of these units would not have been built and rents would have
increased faster. Thousands of
much-needed construction jobs would also have been lost during the downturn
and, as a result, the current affordability crisis would be an economic
GSE loans performed far better than
most originated in the private market. They experienced delinquency rates of
0.45 percent at the end of 2009 compared to 6.5 percent for private-label
Commercial MBS multifamily loans and 5 percent for commercial banks'
multifamily loans. The GSEs also made
loans available for smaller buildings in markets not as popular with
institutional private lenders.
A healthy market for decent rental
housing requires wide access to multifamily mortgages under a range of market
conditions. This financing spurs the construction, maintenance, and resale of
apartment buildings; expands supply where there is pent-up demand, and helps
keep rents more stable for families at all income levels. Despite the role the government has played in
keeping this market alive, some policymakers are considering significant reductions
of government support for all housing finance including multifamily housing. Some
are even calling for the federal government to withdraw from Fannie and
Freddie's multifamily business entirely.
The Federal Housing Finance Agency,
conservator of Fannie and Freddie, appears ready to privatize the multifamily
mortgage market, announcing it was reviewing the possible impact of eliminating
the GSE-issued government guarantee on multifamily MBS. If this reduces construction of new rental
units it could lead to increased rents for millions of low- and moderate-income
families. Abromowitz said that this and similar congressional proposals for
withdrawals of all government support for apartment finance would be a big
He suggests instead that lawmakers
should focus on smart reforms. He referred
to an earlier Center for American Progress plan to preserve a secondary market
for multifamily mortgages. The plan includes an explicit, privately paid for,
and limited guarantee on strictly underwritten MBS issued by private firms. In
addition, to assuring that renters benefit from any government backstop to the
apartment finance market, the plan proposes that at least 51 percent of the
rental housing units financed in the overall portfolio of private firms in a
given year have rents no more than 29 percent of the income of occupants
falling below 80 percent of local median income.
While most analysts agree that a
healthy multifamily market requires a strong government role, not everyone
things this includes an explicit government guarantee. The Center recently
reviewed 21 plans for mortgage market reform and only eight maintained an explicit
guarantee on multifamily securities.
Most of those plans simply mentioned the rental market in passing.
Abromowitz said too many Americans including
many of the most vulnerable rely on the rentals for their housing and cannot remain
an afterthought in deciding the future of the housing market. "We must pursue
approaches that create a lasting 21st-century finance system and meet the needs
of both renters and homeowners," he said.