Rental Market Uptake May Backhandedly Up Housing Demand

Housing affordability pressure combined with tightening rental housing markets “may begin to lead a modest recovery” in housing construction this year, according to the Joint Center for Housing Studies of Harvard University’s “State of the Nation’s Housing 2011” report.

Chris Herbert, research director of the Joint Center for Housing Studies, sees “one bright sign” emerging in the rental market.

As to whether it could mean a boost in the construction of multifamily housing or simply lower-end, one-to-four family unit housing, Herbert told this publication the expectation is for “recovery in multifamily rentals, not single-family construction for the rental market.”

Both younger and older household growth over the coming decade “should continue to lift the demand for rental housing” and smaller, more affordable homes.

The report finds that during the past decade a record 19 million American households—both renters and homeowners—spent over 50% of their income on housing as of 2009, the latest available data.

Herbert calculates that based on current mobility rates of the 8.7 million baby-boom generation households over 65 during the 2010-2020 time period, about 4.9 million will age in place while about 3.8 million “could downsize…adding further to demand for smaller homes.”

The continuing housing affordability challenges facing the nation will become even more pronounced in the rental market.

Tightening rental markets “will exacerbate housing affordability problems” not only for low-income renters but climb the income ladder to affect more moderate- to middle-income households.

Data show rates of severe housing-cost burdens among renting households making between $45,000 and $60,000 per year—which is roughly three to four times the minimum wage—nearly doubled from 2001 to 2009.

Lack of affordability already was a national problem before the foreclosure crisis erupted. As rental-housing prices go up it may become more realistic for some middle-income renters with severe housing-cost burdens to become homeowners transferring rental demand into first-time buyer demand.
“It is still too early to tell” how the mortgage market will evolve over next few years, Herbert said.

Demand for homeownership would expect to increase as rents rise, “serving as a natural dampener” on rent increases.

“What may be different this time is change in the mortgage market making financing more difficult to come by and so limiting access to homeownership.”

“Stubbornly high unemployment and tightened lending standards have limited the ability of many first-time buyers to capitalize on the situation,” said Eric Belsky, JCHS managing director.

Despite relatively higher affordability due to decreases in home prices and interest rates and signs of a recovery in housing the lingering consequences of the recession and financial crisis are thwarting a broader recovery. The report indicates, however, that lack of “convincing signs” of a broad turnaround may not rule out the possibility of a quick turnaround in both home sales and prices. For example, the federally mandated 2010 first-time homebuyer tax credit resulted in a “healthy boost” to the housing market.

“Total housing construction over the previous decade now barely exceeds the lowest level of any 10-year period in records dating back to 1974,” Belsky said, while vacancies remain elevated because demand is sharply down.

What makes a quick turnaround questionable is that housing demand will have to depend on a broader economic recovery, not another government intervention, which most analysts do not see in the horizon.
Herbert says it remains unclear when “the ingredients for a sustained recovery,” including when homebuyers will return to the market in sufficient numbers.

Only employment growth, which has exceeded 200,000 for three consecutive months starting in March, generates “new hope” that a lasting overall economic recovery “will materialize and spur an increase in housing demand and home sales,” Herbert said.