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Spring 2011   

    HIGHLIGHTS IN THIS ISSUE:

        Informing the Next Generation of Rental Housing Policy
        A Spotlight on Rental Market Research
        Multibank Consortia Sustain Communities by Advancing Affordable Rental Housing
        Viewpoints: The Mortgage Interest Deduction


A Spotlight on Rental Market Research

Highlights

      • Although most multifamily properties are rentals, small single-family properties make up roughly half of the rental housing stock.
      • Housing is the largest expense for the majority of low-income households, 70 percent of whom rent. In 2009 there were 10 million extremely low-income renter households, and only 3.6 million units were affordable and available to them.
      • Local market nuances — including population change, economic growth, demographics, and regulatory and geographic constraints on new construction — cause significant regional variation in the demand for, and availability of, affordable rental homes.


During his presentation at the White House’s Next Generation Housing Policy Conference, University of Southern California economist Richard Green suggested that rental housing might need to be “rebranded” — that “rent” carries a negative connotation and should be replaced with an alternative term such as “leased housing.” His comment underscores a broader issue about perceptions and misconceptions surrounding rental housing. For example, in policy circles and in the public consciousness, rental housing, and affordable housing in particular, often evokes images of towering multifamily structures, when in fact such projects make up only about one-tenth of the rental housing stock.

Figure 1: Rents by Development Size

Source: U.S. Department of Housing and Urban Development, Office of Policy Development and Research Tabulations of HUD Residential Finance Survey, 2001
Source: U.S. Department of Housing and Urban Development, Office of Policy Development and Research Tabulations of HUD Residential Finance Survey, 2001


Defining Rental Housing
Rental housing is defined by tenure choice, not structure type. Rental housing units are available in a variety of structures, from detached singlefamily homes to large multifamily buildings. Real estate underwriting has driven the definition of “single-family” properties as one- to four-unit buildings and “multifamily” properties as projects of five or more units. Although most multifamily properties are rental housing, small single-family properties make up roughly half of all rental housing. About 30 percent of rental units are a part of developments larger than 50 units, and only 12 percent of rental units are in structures larger than 50 units. Cumulatively, single-family properties (1 to 4 units) and small rental properties (5 to 49 units) account for nearly 70 percent of all rental units. Therefore, policies tailored to massive multifamily developments will affect only a portion of the rental stock.


In the same way that rental housing is conflated with multifamily housing, affordable housing is frequently assumed to be subsidized housing. Although many of the most affordable rental units are subsidized, most units that are affordable to a household earning 50 percent of the area median income (AMI) are not subsidized. Precise measurement of rental assistance in census data is difficult, but evidence from the American Housing Survey suggests that, of the 17 million rental units affordable to households at 50 percent of AMI, only about 5 million units, or approximately 30 percent, are subsidized. In urban areas, this unassisted affordable stock tends to be older, smaller properties located in low-income neighborhoods that are typically owned and operated by “mom and pop” landlords. For years federal housing policy largely ignored small property operators in favor of larger, more standardized multifamily assets, so local community development financial institutions and bank consortia have stepped in to provide affordable financing for these vital affordable units. (Bank consortia are described in the next article.) These small properties have lower median rents and higher shares of affordable units than larger buildings (fig. 1), making them a critical source of adequate, affordable units to low-income renters who do not receive rental assistance. Because of their age and location, these buildings operate at modest rents, which benefit low-income tenants but jeopardize the long-term financial viability of the properties, and their accumulating unmet maintenance needs eventually result in high loss rates.1 Preserving these structures is an important element of a broader strategy to ensure quality, affordable rental homes for lowincome Americans, but it is not a substitute for basic rental assistance.

Single-family homes represent a significant portion of the rental housing stock.
Single-family homes represent a significant portion of the rental housing stock.

Rental Affordability Dynamics
More than 70 percent of HUD’s budget is devoted to some form of rental housing assistance. This assistance prevents homelessness, ensures safe and decent housing, and enables the poor to move to high-opportunity neighborhoods by easing the burden of high housing costs. Rental housing affordability is the most widespread and measurable housing problem that HUD programs address.

No consensus exists on how best to measure rental housing affordability, but the approach that many government officials, researchers, advocates, mortgage lenders, and property managers have adopted has been to gauge affordability based on rent-to-income ratios.2 This method is useful because it aligns with HUD program eligibility rules and allows for relatively easy historical comparisons.

For the past several decades, the affordability “standard” against which a unit is judged has been whether gross rents account for less than 30 percent of the tenant’s monthly income. HUD’s Office of Policy Development and Research has developed and refined various measures to capture rental housing affordability need. One measure is worst case housing needs, which consists of very low-income renters (those earning less than 50 percent of AMI) who do not receive assistance and who pay more than 50 percent of their income for housing or live in severely inadequate housing, or both. In 2009 the recession drove worst case housing needs to nearly 7.1 million households, the highest level on record in both absolute and percentage terms (fig. 2).3

Another metric, which more directly takes into account the availability of the rental stock, is the difference between the numbers of low-income renters and units affordable to those renters. For instance, in 2009 there were 10 million extremely low-income renter households (those earning less than 30 percent of AMI) and just 6.2 million units that were affordable to those households if they were paying no more than 30 percent of their income for housing. Adding the dimension of availability, which addresses how higher-income households might outcompete low-income tenants for cheap units, just 3.6 million affordable and available units existed, or just 36 per 100 extremely low-income renters.4 This gap narrows some for very low-income renters at about 68 affordable and available units per 100 very low-income renters.


Figure 2: Worst Case Housing Needs: 1987–2009

Severe problems = Paying more than 50% of income for housing, or in severly inadequate housing, or both.Source: American Housing Survey, 1987–2009
Severe problems = Paying more than 50% of income for housing, or in severly inadequate housing, or both. Source: American Housing Survey, 1987–2009

Regional Variation
Because housing markets are inherently local, describing rental housing affordability at the national level misses important local nuances. Some markets have significant regulatory and geographic constraints to new construction, whereas others are relatively unconstrained. Demand for rental housing also varies dramatically depending on the location’s employment growth, immigration, housing prices, and demographics. These factors create frictions in housing markets that often exacerbate rental affordability stresses.

Figure 3 shows how these affordability stresses differ across markets. Renters at 30 percent of AMI face housing cost burdens in nearly every market. Very low-income renters at 50 percent of AMI have few options in high-demand, supply-constrained markets such as Los Angeles and New York, where there are fewer than 50 affordable and available units per 100 renters even at 50 percent of AMI. Markets that have excess housing because of significant population loss, such as Detroit, Buffalo, and Cleveland, are far more affordable for low-income renters above the poverty line, with more than 100 affordable and available units per 100 very low-income renters. These markets have high vacancy rates even in more affordable units (those renting at 50 percent of AMI).5 Federal housing policy should promote market-sensitive investments with the appropriate mix of rehabilitation activity and new construction so that rental housing policy facilitates balanced, stable markets.


Figure 3: Affordable and Available Units Per 100 Renters

Figure 3: Affordable and Available Units Per 100 Renters

Rental housing policy is of great interest to social policymakers because it is, at its core, low-income housing policy. Nearly 70 percent of the country’s poor live in rental housing, and housing is the single largest expense for nearly all of them. High housing costs reduce discretionary income, create housing instability that can lead to homelessness, and deter households from locating in neighborhoods of opportunity. In the HUD-funded Abt Associates study Effects of Housing Vouchers on Welfare Families, the most rigorous research to date on the effects of rental assistance, providing rental assistance to poor families is shown to reduce street homelessness and doubling up and to move families to less-segregated neighborhoods with reduced poverty, unemployment, and number of people receiving public assistance.6 Housing assistance remains an attractive vehicle to improve the material well-being of the poor because housing is such a sizeable expense. However, although evidence is somewhat mixed, rental housing assistance receipt has been shown to have a modest negative earnings effect, which typically dissipates over time. In contrast, other income supports, such as the Earned Income Tax Credit (EITC), have positive employment effects.7 Whether cash transfers such as the EITC are a complement or substitute for rental assistance is part of a broader debate about how to best assist poor households.



  1. William Apgar and Shekar Narasimhan. 2006. “Enhancing Access to Capital for Smaller Unsubsidized Multifamily Rental Properties.” Prepared for the Revisiting Rental Housing: A National Policy Summit, Cambridge, MA.
  2. Some academics have criticized this approach, offering alternatives based on the divergence of price and marginal cost or residual income (assessing affordability change based on changes in real income after housing expenses).
  3. U.S. Department of Housing and Urban Development, Office of Policy Development and Research. 2011. Worst Cast Housing Needs 2009: A Report to Congress.
  4. Unpublished tabulations of 2009 American Housing Survey data by the U.S. Department of Housing and Urban Development, Office of Policy Development and Research.
  5. Unpublished tabulations of 2009 American Community Survey Public Use Microdata Sample (PUMS) data by the U.S. Department of Housing and Urban Development, Office of Policy Development and Research.
  6. U.S. Department of Housing and Urban Development, Office of Policy Development and Research. 2006. Effects of Housing Vouchers on Welfare Families.
  7. Ibid; Brian A. Jacob and Jens Ludwig. 2008. “The Effects of Housing Assistance on Labor Supply: Evidence from a Voucher Lottery,” Working Paper 14570, National Bureau of Economic Research; Deven Carlson, Robert Haveman, Tom Kaplan, and Barbara Wolfe. 2009. “Long-Term Effects of Public Low-Income Housing Vouchers on Labor Market Outcomes,” Discussion Paper 1363-09, Institute for Research on Poverty.

 

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