The latest research from the Harvard Joint Center for Housing Studies highlights a problem that many communities are experiencing firsthand—that the cost burden for rental housing is expanding and pushing higher up the income ladder to affect middle-income households more significantly.
“Fundamentally, there is lots of high demand and not enough supply, and that is resulting in higher rents for everybody,” said Christopher Herbert, managing director of the Joint Center for Housing Studies. Herbert and other industry stakeholders from both the public and private sectors gathered in Minneapolis to discuss changing dynamics within the renter pool and the broader impact on the rental housing market.
The shortage of affordable rental housing options across price points was a dominant theme within the America’s Rental Housing 2020 report. Nearly half of all renter households in America, 47.5 percent, are considered cost burdened. Effectively, that means that those 20.8 million households pay at least 30 percent of income for housing and utilities. One out of every four renter households is considered severely cost burdened, paying more than 50 percent of their income for housing and utilities. In particular, middle-income renters in the 25 most expensive U.S. housing markets saw the biggest increases in cost burden. Based on 2018 data, 70 percent of households earning between $30,000 and $44,999 in those 25 metro areas were considered cost burdened.
In his address to introduce the report results, Neel Kashkari, Federal Reserve Bank of Minneapolis president and CEO, noted that growing the supply of affordable housing options will require both public- and private-sector participation. Although there are many thoughtful, targeted government programs, there simply is not enough money in any of those budgets to scale up to the millions of American who need help in affording a place to live, he said.
“Our research has shown, as many others have shown, that if the private sector builds more units, even market-rate units, it adds supply to a city or region that ends up creating space for everybody,” said Kashkari. The question is how to encourage the private sector to move in to create and preserve affordable housing alternatives at scale so that all the other targeted government programs can also do their part, he added.
Changing Renter Pool Creates Ripple Effects
Over the past dozen years, the renter pool has experienced enormous demographic shifts that are having significant impacts on the broader rental market. Some renters face barriers to homeownership that are keeping them in the renter market, while others are driven more by fundamental shifts in preferences related to lifestyle changes.
Some of the notable takeaways from the Harvard report that are affecting both affordable and market-rate housing markets include the following:
- The U.S. renter population seems to be settling on a plateau, accounting for 35.6 percent of households as of the third quarter. That percentage was unchanged year-over-year and was very similar to the rate that existed in 1994 before the start of the housing boom.
- The biggest change in the renter market has been a rise of high-income earners. Households earning $75,000 now represent 26.5 percent of the renter market.
- According to the U.S. Census Bureau, the national rental vacancy rate edged lower to 6.8 percent in mid-2019, which is the lowest level the bureau has reported since the mid-1980s.
- Developers are still playing catch-up for the lack of rental units built during the Great Recession. Rental property construction remains near its highest levels in 30 years. Production in 2019 was expected to match or exceed 2018 activity, which included construction starts on 374,100 units.
- The supply of high-end units—those renting above $1,000 per month—surged by 5 million between 2012 and 2017.
- At the same time, the inventory of low-cost units renting for less than $600 per month dropped from 33 percent of rental stock in 2012 to 25 percent in 2017.
Low-income people have always felt that cost burden. Now that more people with influence and wealth have a direct connection to the housing crisis, it is attracting more attention, said Deidre Schmidt, president and CEO of CommonBond Communities. She participated in a panel discussion following the release of the research report. “The fact that finally the pain is being felt more uniformly and touching more people is actually an opportunity for us,” said Schmidt. Public- and private-sector groups are more compelled to come together to explore creative and innovative solutions on how to finance, construct, and operate housing so that people have the stable housing they need to be successful, she added.
Solutions Require Public and Private Participation
Minneapolis was selected as the host city for the release of the Harvard report in part for its progressive approach to tackling affordable housing issues. Earlier this year, Minneapolis became the first large American city to end single-family zoning as part of its Minneapolis 2040 strategic plan. The city hopes that eliminating restrictive zoning will help create more affordable housing alternatives, such as shared housing, duplexes, and triplexes. The city also has introduced a new inclusionary zoning ordinance that is intended to spur more mixed-income units within new market-rate apartment development.
“Zoning is a big step in the right direction, and I commend Minneapolis for being forward thinking in its zoning changes,” said Tony Barranco, senior vice president of real estate development at Ryan Companies and another panel participant. “However, we have to be very careful in public policies that constrain supply, because the top-end class A product that we build today is the class B in 15 years and class C in 30 years,” he said. By not building any housing, that is only hurting the housing market overall, he added.
Minneapolis also is a prime example of the pervasive housing shortage that is contributing to rising rents and affordability issues. The universe of market-rate apartments across the Minneapolis/St. Paul metropolitan statistical area spans some 300,000 units with a current vacancy rate hovering at about 3 percent. To get to the point of healthy vacancy of 5 percent would require 6,000 units—$1.5 billion in housing—falling from the sky tomorrow, said Barranco.
Many metro areas across the United States are struggling to catch up with demand following the pullback in building during the financial crisis. One challenge to creating new supply, and especially affordable new supply, is rising building costs. For example, the cost to build a wood-frame, six-story building on the exact same site in the Minneapolis metro area has jumped 70 percent since 2012 due to higher land and construction costs, noted Barranco.
The high cost of building new highlights the importance of preserving the existing affordable housing stock, including subsidized housing that may be coming out of service and is at risk of being converted to market-rate housing. The preservation of naturally occurring affordable housing is another priority. As properties age, they generally drop into more affordable categories, and it is important to not take that stock for granted, noted Schmidt. “Every time a transfer occurs, it comes with a rent increase and potentially a dramatic displacement for folks who get discharged into a market that doesn’t serve them well and might even actively discriminate against them,” she said.
Stakeholders agree that affordable housing is more challenging today given the higher-cost environment. Cheap, accessible land for housing development is difficult to find today, particularly in urban centers. “What that means is that we have to be much more creative, and much more open to how we work within the built environment,” added Herbert.