Expect More Growth in Rental Housing Supply and Demand

The number of households moving out of their owned home and into rental housing has surprised housing experts. The expected migration of millennials from rental housing into home ownership is taking longer than most of us expected, and new immigrants continue to choose rental housing for economic reasons. Of course, the high prices of today’s single family homes compels many low and moderate income households to choose rental units. In aggregate, the demand for rental housing is expected to grow in both the short and longer terms.

Between 2006 and 2016, renter occupied housing grew by 7 million units, while the number of owner-occupied housing units relatively remained unchanged over that decade. In this time, the U.S. homeownership rate fell to 63%, the lowest since 1965. Renters occupying single-family houses grew from 15% in 2006 to 19% in 2016. Many single-family home owners intentionally converted their home into an income producing asset lured by high returns. Those new landlords may have moved into other rental units or houses, including newly built, lavishly equipped units.

A few years earlier, many Millennial households seemed disinterested in home ownership, preferring an urban renter lifestyle. Millennials face financial burdens such as college loans, and until recently, a scarcity of jobs and low pay for those that were available. Attitudes have recently changed, and now a majority of Millennials are looking forward to a home of their own.

Most Millennials have difficulty assembling an adequate down payment for their first home, and a very common “strategy” is to ask a family member for financial assistance. The funding challenge is made more difficult by the escalating prices for existing and new homes. Also, the current stock market slump reminds Millennials of the financial pain that their family homeowners suffered in the great real-estate induced recession. Millennials may want a home of their own, but circumstances are likely to delay their acting on that wish.

While there are few affordable new or existing homes for low and moderate income households to purchase, there are shortages of rental homes as well. If the standard for housing affordability is that no more than 30% of household income is spent on housing, then households with an income of $26,000 or lower are in trouble. Between 2006 and 2016, the number of households with income of $26,000 or less grew by 1.8 million, but the number of housing units that are affordable to them ($650 per month or less) declined by 500,000 units.

These shortages of affordable homes vary by city, and the deficits are most prevalent on the Western and Eastern coasts. In Dallas, during that same period, the number of low-income households grew by 40,000, while the number of affordable rentals declined by 70,000 units. In DC, the number of low-income households grew by 45,000, but affordable rentals did not grow. In high income areas like New York City, affordable units declined by 75,000.

Strategies that municipalities can use to increase the proportion of affordable units include:

  • Streamline permitting for affordable housing and expedite the review of low- and moderate-income housing developments;
  • Relax zoning restrictions that discourage high-density development; and
  • Change local codes to allow Accessory Dwelling Units, i.e. “granny flats” or “garage-overs.”

As well, there are brute force tactics that produce more government-owned housing, a practice that has had, at best, mixed success in urban areas. The higher retail mortgage rates, higher house prices, and significant student loans will constrain purchases of single-family homes, and tilt investments toward rental units.

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