More and more Americans are becoming renters. The national apartment vacancy rate now stands at 4.3%, the lowest level since the fourth quarter of 2001, according to the research firm Reis. Since 2009, the increase in demand for apartments has outpaced the increase in supply. In many communities, rents have risen significantly as a result.
Rising rents hit our nation’s lowest-income families particularly hard. Today, nearly two-thirds of extremely low-income renters — those earning 30% or less of the area median — spend more than half their income just on housing costs. A major factor contributing to this burden is the scarcity of rental units affordable to those at the bottom of the income ladder.
Our nation’s changing demographics also suggest that demand for rental housing will surge dramatically in the coming decade, with significant implications for rental affordability. Millenials — those 62 million young Americans born between 1981 and 1995 — are now beginning to form households for the first time. Many are choosing rental housing as the most convenient and affordable option. New immigrants will also look to rental housing as their preferred housing choice. And as our country becomes increasingly diverse — the Hispanic share of the population is expected to approach 30% by mid-century — renting will be the most sensible alternative for many families who lack savings for home-purchase down payments.
Add to this mix tighter mortgage underwriting standards that will at least delay homeownership for some families, and the message is clear: Increasing the supply of affordable rental housing must become a higher national priority. That’s a key conclusion of “Housing America’s Future: New Directions for National Policy,” a report released earlier this year by the Bipartisan Policy Center’s Housing Commission.
So, yes, a recovery in multifamily rental production is now underway, as apartment developers produce more units to match the increase in demand. But the estimated 180,000 multifamily units that will be produced this year is far below the annual production of 300,000 new units we believe will be minimally necessary to meet demand for the foreseeable future.
Other complicating factors suggest the private sector cannot do it alone and that sustained government support will be necessary to increase affordable rental supply, particularly for lower-income households.
First, as we enter a period of increased rental demand, we are operating from a significant deficit position. In 2009, construction financing dried up and multifamily rental starts dropped to just 82,000 units — the lowest since World War II. New production barely picked up in 2010, with only 85,000 new starts. Production in subsequent years has been higher but significantly lower than in previous decades, when annual production often exceeded 300,000 units.
Second, there is the “treadmill effect”: A substantial number of new rentals must go online annually just to keep up with the estimated 100,000 older units that are removed from the rental stock each year.
Third, regulatory requirements, local land use rules, and other artificial barriers often increase costs and prevent the private sector from building affordable multifamily units, particularly in high-cost metro areas.
And, fourth, it can take years for apartment developers to acquire a site, obtain financing and then build. As demand surges, there will be a considerable time lag before new units are available for occupancy.
One important step the federal government can take is to preserve and expand the Low Income Housing Tax Credit, a tax incentive program first created in 1986 that has proven to be our nation’s most effective tool in supporting the production of rental housing for low-income families. Increasing the annual LIHTC allocation by 50% — a key commission recommendation — could support some 400,000 affordable rental units over the next 10 years. Providing “gap financing” to support LIHTC projects is also necessary.
In addition, the federal government should step up its efforts to educate local leaders about the negative effects of regulatory barriers on affordable rental housing and highlight promising approaches to removing these barriers. Conditioning access to federal housing and transportation funds on the development of affordable multifamily housing close to employment opportunities can also pay dividends, without requiring additional federal spending.
As Washington designs a new housing finance system, the commission believes the government must continue to function as the insurance provider of last resort for securities backed by multifamily mortgages. Such a guarantee is necessary to promote liquidity and to serve as a countercyclical buffer when private capital exits the multifamily market, as we saw during the recession. The commission also supports an “affordability” requirement for issuers of multifamily securities to ensure the system primarily supports rental housing for low- and moderate-income households.
In the coming years, growing demand for rental housing is likely to push rents further out of reach for many Americans, including the low-income families least able to afford it. A concerted focus on increasing rental supply in those communities where it is needed can help reduce this pressure.
