There are now more Americans renting than at any other time in U.S. history. Over the last decade, the share of renter households in the U.S. has increased significantly as homeownership rates have fallen from 69.2 percent in 2004 to 63.4 percent in 2015, the lowest level since 1967, according to a recent joint report by the Joint Center for Housing Studies of Harvard University and Enterprise Community Partners. In addition, it is projected that over the next decade, the majority of new household formation will be renters, a reversal from the trend of the past few decades. As such, the demand for rental housing will continue to grow. In addition, renters will be coming from more diverse socioeconomic backgrounds.
The net increase in the rental housing inventory has not kept pace with demand and therefore vacancy rates have declined and rents have risen significantly over the past few years. Unfortunately, for most renters, household income tends to be significantly lower than that of homeowners and their wage growth has not kept pace with rent growth. The National Multi Housing Council estimates that nearly 45 percent of renter households have incomes of less than $25,000 and an additional 29 percent have incomes between $25,000 and $50,000. While incomes have begun to show some modest growth, the Joint Center for Housing Studies reports that real incomes for households in the 25 to 34 age bracket are back to mid- 1990s levels and for households in the 35 to 44 age bracket are back to mid-1980s levels.
Given this “one-two punch,” a record number of renters are becoming severely rent burdened, generally defined as renters who are spending more than 50 percent of their income on rent. In 2013, one in every four renters, or 11.2 million renter households, paid more than half their income toward rent and there appears to be little prospect for improvement. Earlier this month, the Joint Center for Housing Studies of Harvard University and Enterprise Community Partners projected how many households would be severely rent burdened in 2025, given demographic trends and various changes in income and rent levels. They found that demographic trends alone would raise the number of severely burdened renter households by 11 percent, from an estimated 11.8 million in 2015 to 13.1 million in 2025. In a worst case scenario, the number of renters paying more than half their income would reach 14.8 million by 2025, an increase of 25 percent.
The need at the lowest income level households is acute. In 2013, 11.2 million extremely low-income households competed for 7.3 million units affordable to them, representing a 3.9 million unit shortfall, according to the report. While there are government programs to facilitate the new construction of affordable units (affordable at less than 60 percent of area median income (AMI)) as well as the use of rental subsidies for the lowest income households, they are insufficient to meet the demand.
In addition, there is a growing realization that severe rent burdens are also beginning to affect workforce, or moderate income, households. We have come to understand that there is not just one definition of affordability. What is considered affordable depends largely on the metropolitan area in which you live and whether wages are keeping up with housing and rental costs. In high cost metropolitan areas, housing affordability has reached critical levels due to significant barriers to new development and some of the largest increases in housing costs. Unfortunately, there are few, if any, subsidies available for those households who earn more than 60 percent of AMI and who are severely rent burdened.
Access to safe, decent, affordable housing is a fundamental building block for the rest of people’s lives. Being severely rent burdened forces difficult choices with respect to other critical aspects of life, such as food, health care and education. This problem is complex and will require comprehensive, coordinated solutions at the federal, state and local levels. These solutions must address incentives for the production of new affordable and workforce housing, the preservation of existing housing (especially important for meeting the needs of workforce housing), reducing the cost of developing new affordable housing, the efficient use of the growing inventory of single-family rental housing and increased subsidies to low income and workforce housing renter households.
John Powell serves as executive vice president of Bellwether Enterprise, a national commercial and multifamily mortgage banking company.