The great Italian artist and inventor, Leonardo da Vinci, advised that a full understanding of reality starts with the realization that “everything connects to everything else.
This truth is apparent in today’s U.S. housing market. What’s happening in the rental segment of the market affects demand for single-family homes, which in turn impacts the overall U.S. economy.
It is all connected.
Unfortunately, the sum of these links is a U.S. economy that today remains in a weakened state.
Millions of families, many of them having lost their homes to foreclosure, entered the rental ranks in the wake of the Great Recession.
More recently, the demand for rental housing has grown dramatically as hundreds of thousands of Millennials have formed households for the first time and have sought rental housing, often in urban centers.
Older adults seeking to “downsize” into smaller homes have also contributed to the intensified demand for rental housing.
This demand, combined with an acute shortage of affordable rentals, is sending rents into the stratosphere in many communities. As a result, high housing costs are a big reason why so many families are struggling just to make ends meet.
According to Harvard’s Joint Center for Housing Studies, the number of renter households who are “housing cost burdened” (paying more than 30% of their incomes on rent) hit a record high in 2013 – nearly 21 million.
More than 11 million of these households spend in excess of 50% of their income just on rent.
Rising rents, in turn, are acting as a drag on demand for single-family homes, as fewer families are able to save for a mortgage down payment to finance their first home purchase.
Many of those most negatively impacted are younger households who are also often burdened with high levels of student loan debt.
In fact, the share of first-time buyers has declined for the third consecutive year, and at 32%, has plummeted to its lowest level since 1987, according to a new survey by the National Association of Realtors.
As NAR’s chief economist explains, “the housing recovery’s missing link continues to be the absence of first-time buyers.”
The end result is an underperforming single-family housing sector that translates into a sluggish economy: real gross domestic product increased at an anemic annual rate of 1.5% in the third quarter of 2015, in part because of lackluster growth in new single-family construction.
In the coming years, the demand for rental homes will likely continue to be strong because of our nation’s changing demographics. The Urban Institute projects that 62% of new housing demand will be rental during the decade of 2010 to 2019, while 56% will be rental during the 2020s, reversing the mix of the two previous decades where most demand was felt in the ownership side of the market.
With more and more households seeking rental homes, rents should continue to soar.
A new study by Harvard and Enterprise Community Partners concludes that, if rent gains continue to outpace income growth as they have done in years past, the number of “severely cost-burdened” renters (those paying in excess of 50% of their incomes on rent) could reach 14.8 million by 2025, a 25% increase from 2015.
These trends do not bode well for the single-family segment of the housing market.
Unless remedial action is taken, rising rents will continue to act as a barrier to homeownership for many families who will be unable to accumulate the funds necessary for a mortgage down payment. Millions will find themselves stuck in unaffordable rentals while being cut off from the opportunity for homeownership.
To strengthen demand for single-family homes and help jump-start the economy, we need to address the problems at the core of today’s rental affordability crisis.
Increasing the supply of affordable rental homes through a heightened commitment to policy tools like the Low-Income Housing Tax Credit should be priority number one.
This reasoning – promoting homeownership by making rental housing more affordable – may sound counterintuitive, but as da Vinci would say, it’s all connected.