More than half the new households formed in the next six years will be renters rather than homeowners. Yet renter incomes are on average only 70 percent of homeowner incomes, so where will the new renters live? Five experts in rental housing pondered these and other questions about the future of multifamily housing on November 5, at the second annual Data, Demographics, and Demand symposium sponsored by the Urban Institute and CoreLogic.
In a panel moderated by Clea Benson of Bloomberg News, the experts also considered the role of Fannie Mae and Freddie Mac, the government-sponsored entities (GSEs), in multifamily housing—part of the GSEs' business that held up well during the Great Recession. They also considered how much rental demand might be met by conversion of single-family properties from ownership to rental and how the market might better serve lower income renters.
The panelists identified three emerging trends:
- Rental supply is tight and getting tighter. According to panelist David Borsos, Vice President, Capital Markets of the National Multifamily Housing Council, just to keep up with normal rental demand, including the yearly loss of about 100,000 units, the country needs 400,000 new rental units a year. From 2010 through 2013, well under 200,000 units were built annually. Starts in 2014 will exceed 300,000 units, but those won’t come on line until at least 2015. The result is low vacancy rates and high rents, alongside stagnant incomes. And these are not normal times since a much higher portion of new households will be renters compared with the era before the financial crisis noted panelist Shekar Narasimhan, Managing Partner of Beekman Advisors, concurring with Rolf Pendall, Director of the Urban Institute’s Metropolitan Housing and Communities Center, from the first panel.
- Single-family rentals will fill a large part of the supply gap. Moreover, said Narasimhan, much of the rental housing currently under construction will be affordable only to the top 4 to 5 percent of renters. Other renters will need to rely on an already-constrained supply of existing housing, much of which will be single-family rentals.Indeed, 50 percent of the country’s rentals are already in buildings for one to four families, panelist Sean Dobson, Chief Executive Officer and Chairman of Amherst Holdings, an owner of single family rentals, reminded us. Amherst’s average tenant is a family at the national median income ($55,000 a year) that pays $1,100 a month for rent—“an incredibly affordable situation . . . [that] doesn’t require new construction.” But, Dobson said, there are no institutional financing programs for single family rentals, which ultimately increases rents. Narasimhan suggested that if the GSEs instituted such a program, “some tenure obligations on your side and some rent stability” would be helpful to the market.
- More renters will likely face a higher burden in coming years. With high rents, stagnant incomes, and constrained supply, Narasimhan said “it would not shock” him if the 25 percent of renters who pay more than 50 percent of their income for rent and utilities goes up to 35 percent in a few years time. But there is very little appetite in Washington for reducing the burdened percent by increasing subsidies either to renters or to producers. Rather, “the best hope” is to enact housing finance reform, with a dedicated stream of revenue going to trust funds that produce affordable housing and support innovation.
The experts then turned to the role of local and national government in addressing these concerns:
The GSEs are critical to the health of the multifamily market. Panelist Chris Tawa, multifamily housing policy manager at the Federal Housing Finance Agency (FHFA), suggested that these challenges are not lost on the FHFA. He noted that the FHFA and GSEs together are taking steps to enhance the GSEs’ activities with respect to small multifamily properties, manufactured housing, and tax-exempt bonds. The FHFA expects to pilot a program of back-end risk transfer for multifamily properties which, Tawa pointed out, would be in addition to the risk-sharing that is an integral part of the GSEs’ multifamily programs.
The GSEs’ multifamily business is foundational to the functioning of the multifamily market, said panelist David Brickman, Executive Vice President, Multifamily Business at Freddie Mac. The market would not function as well as it has, nor build as much as it is building, without the GSEs. And, added Borsos, “if you want the GSEs or some other entity to play a countercyclical role, . . . they have to be around even in markets where there is strong demand from the private market.”
Local choices will have a significant impact. While we focus on the national, the regulatory, and finance in Washington, Borsos, Narasimhan, Dobson, and Brickman all reminded us that what happens at the local level, including land use and property taxes, can make an enormous difference in the supply of affordable rental units. Dobson said in relation to repurposing single family homes for rental, however, “sometimes the local government is a little confused about what it wants.”
Although the multifamily business is booming from the developers’ and investors’ perspective, the outlook is not promising for renters, who face supply constraints with little hope of significant, direct government efforts that will expand the availability of affordable units. The panel did discuss actions at the margin—improvements to the Low Income Housing Tax Credit, enhanced financing programs at the GSEs that can lower costs, partnerships with local governments to bring vacant single-family properties back into the housing stock.
But is there an appetite for significant change that will make renting more affordable? Perhaps not. As Narasimhan said with respect to housing finance reform, “the current system, no matter how flawed it may be, actually serves a rather large number of people who are in the industry rather well.”
Photo: Expensive new rental housing in Washington, DC. (AP Photo/Pablo Martinez Monsivais)