Eric Belsky on Rental Housing in the U.S.

by Molly Lanzarotta, interviewed on 12/19/13

Affordability problems for American renters have skyrocketed over the past decade. Eric Belsky, managing director of the Joint Center for Housing Studies (JCHS), discusses housing in the United States and issues for both renters and home owners.


Q: Since signs of the U.S. housing crisis first emerged in 2007, attention has focused on home owners. What has led to the current crisis for renters?

Belsky:  Well, there are a number of things that are contributing to the problems that renters are experiencing. Clearly, one of them is the fact that a lot of people have lost their jobs or had hours curtailed. If they had two earners in the household, they now have one earner. So, whatever income they have doesn’t stretch as far. And at the same time that incomes for both low and moderate income people have been losing ground to general price inflation, rents have been moving up ahead of inflation, largely because rents are more influenced by increases in things like utility and other operating costs.

Construction costs have also been going up and for the last two or three years so we’ve seen tightening in rental markets. And in addition to the regular cost-push factors on rents, you have the ability of landlords to be able to pass along larger rent increases because markets are tight. Landlords went through a number of years during which they weren’t able to increase rents to cover their costs, so this is a way for them to make up for some lost ground. But it translates into higher rents for renters.

Q: Some analysts are calling this the worst rental housing crisis ever in the United States, but we all remember other boom and bust cycles. What’s different this time?


Belsky:  I think what’s different this time is that the crisis is coming after decades of eroding affordability for renters, and the period since 2000 has seen a dramatic worsening of the problem. So, the shares of people, for example, that spend more than half of their income on housing went from about one-in-10 households in the 1960s to about one-in-five in 2000. Since 2000, they’ve gone to more than one-in-four households. So, this problem has gotten dramatically worse very quickly.

Q: Urban areas where the rents have been high and stayed high – like New York and Boston – are especially squeezed when it comes to the current rental housing crisis. In those cities’ recent mayoral races, we heard a lot about housing issues. What can policy makers do to effectively address the housing challenges their cities face, from homelessness to high rents to unaffordability for potential home owners?

Belsky: Well, first of all, it’s great to see housing as a critical topic and issue in big city mayoral races. I think it’s a bread-and-butter issue. So, the fact that politicians are starting to pay attention to this issue is, at some level, unsurprising. But often housing has not been an issue in mayoral races because most of the effort to try to address these severe affordability problems have emanated from Washington and have involved federal programs and federal spending.

There’s a whole range of things that both state and local governments can do – from regulation making it easier to build at greater densities and smaller units to more traditional subsidies and tax incentive programs. Many cities have been doing a lot in this space in recent years, and they’re starting to do more.

One idea is to try to pass some kind of inclusionary zoning ordinance. These ordinances require developers of market-rate rental housing to set aside a certain number of units for more affordable rent levels. Very often this is done not through a mandatory set-aside, but through some kind of incentive zoning, which makes it more attractive to be able to build on a site by allowing more units to be built and in return the developer agrees to provide some affordable housing. Sometimes they do it through a contribution to a trust fund. Cities can also use their own land or repurpose buildings, like schools that are no longer being used, and cycle those into the private sector at some kind of discounted price, again, in return getting some number of affordable rental units. And at the margins, cities that can’t generate much from their basic property tax base can use some of the generally appropriated funds to be able to help assist renters, and so some cities have at least some programs that do those kinds of things.

Q: During the housing foreclosure crisis, there was a lot of talk about the advantages of renting over homeownership, especially in light of risky home loans. Now many Americans find themselves in a double bind where home loans are still difficult to obtain while renting requires them to spend a prohibitive percentage of their income. What is the prudent choice now for families and individuals looking for decent, affordable housing in America?

Belsky:  When you look at any individual household’s set of circumstances, they have to make a number of judgments when they make a decision about whether to buy a home or continue to rent, assuming that that’s what they’re now doing. They have to determine what they think house prices may do in the future, what they think interest rates may do in the future, and what they think rents may do in the future. What we’ve seen lately is rents continuing to inflate for three or four years after a period during which there was a stall in rents surrounding the economic crisis.

We’re back in an environment now in which rents are moving ahead of inflation, and in that kind of environment, I think a lot of people look around and they say, what would it cost to buy a place that was similar to the one that I want to rent? And when they do that comparison, what they find is, on a monthly cost basis, it may look quite attractive to own. And they have the potential for appreciation. And when they write that mortgage check some portion goes to paying down the principal, which helps them build an asset through home ownership.

They also take a risk, of course, that prices may fall. However, right not it appears prices are more likely to continue climbing for a while. But even if they don’t, homeowners will begin to pay off their principal over time. So, I think a lot of people are going to look at that, and they’re going to think that this might be an appealing time to buy.

Another challenge for home buyers is a set of some rather restrictive underwriting standards. So, people may have the will to buy a home, but they may not be able to do it due to these mortgage qualification standards. So, home ownership is very often a prudent financial decision. It depends on individual circumstances. It’s not a certain bet, but I think the larger issue now is a lot of people may want to avoid paying these escalating rents by buying a home, yet they will not have the ability to do so because of the lending standards.

Q: The Joint Center for Housing Studies recently released a major report about renting in the United States. Are there other highlights from that report that we haven’t covered yet that you’d like to mention?

Belsky: Well, I think it’s really interesting, of course, to look at the fact that the home ownership rate has been on the decline for a number of years. So it peaked at about 69 percent; it’s now down to about 65 percent. That doesn’t sound like a lot, but that four percentage points is well over five million households that might, under other circumstances, have been owners and now are renters.

So, we’ve just seen a real updraft in demand for rental housing, and we see that against a backdrop of a very significant decline in production of rental housing units, largely multi-family apartments. When you get that combination of a surge in demand – in fact rental housing demand is running at a record pace going all the way back to the 1970s, which is when the baby boom generation entered its young adulthood and drove large increases in renter households – we’re seeing record growth against this backdrop of very slow growth in production, and that’s creating this tightness in the market. It’s creating inflationary pressures. It’s good for the economy; it moves the number of starts up. It increases the number of jobs, but it makes it difficult for renters.

Another important issue here is the consequences of these very severe affordability problems in the rental market. We looked at how much people who earn $15,000 or less working full-time at the minimum wage spend on a variety of different necessities. It’s really dispiriting when you see that they spend $140 less, on average, on food. So, it makes you worry about food security when people are spending this much to make sure that they’re not out in the streets. When you look at how much less they spend on savings for retirement – that’s $110 less a month – which means that this is a long-term problem that’s going to affect financial security of a lot of households for a long time to come.

So, these issues are not just housing issues. They’re really issues for the broader society, for the broader economy. For individuals who are shouldering these burdens it’s a very, very challenging individual burden, and for families it’s very troubling to see them having to make trade-offs between having a decent place to live and how much food they have to eat.

Q: Are there any interesting regional elements to the report that you want to highlight?

Belsky: Well, what’s interesting about what’s happening right now in terms of how markets are shaking out across the country is that the overwhelming majority are all moving in the same direction on the rental market side, which is tightening of rental vacancy rates. Now, this isn’t in every metro, but it’s in the overwhelming majority of the 100 largest metro areas. We’re starting to see the signs that rent increases may stabilize and slow a little bit, but we are really seeing a very broad-based recovery.

I think one of the significant differences across metropolitan areas is how much of a shift there has been back from owning to renting, and how that shift has been satisfied. What we discovered in the report, when you look at this nationally, just between 2007 and 2011, about 2.7 million single family homes that had been owned moved into the rental market. So, in many markets, what we’re seeing is the rental market playing an absolutely critical role in the broader adjustment of housing markets – taking homes off the market for sale so that prices can begin to stabilize in the ownership market while satisfying a critical demand for housing through rentals. And those places that have seen the biggest shifts and also the largest increase in investor demand for single family homes are some of the hardest hit places like Las Vegas and Phoenix, but we’ve also seen heavy activity in California, Atlanta, even places like Minneapolis.

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