When it comes to real estate we like the stories that reflect success. It’s a social good when people are able to buy a first home, move up, or create personal wealth through mortgage amortization and rising home values.
But in any society not every everyone is able to grab the brass ring. If you travel you know that every destination has pockets of poverty and it follows that not everyone has shared in the recovery which has slowly followed the housing crash of 2007/2008.
A study by Enterprise Community Partners and the Harvard Joint Center for Housing Studies found that we’ll likely have 13.1 million “severely cost-burdened households” by 2025, up from 11.8 million in 2015. The projection assumes that both rents and incomes will grow in line with 2 percent inflation, but there are no stone tablets which say inflation is limited to 2 percent, that rents cannot go far higher, or that incomes for millions of people will hold steady or not fall.
In congressional testimony, Grant Whitaker, President of the National Council of State Housing Agencies, explained in August that “nationwide, there are 11.4 million ELI (extremely low-income) renter households, but only 4 million rental homes affordable and available to them, leaving a gap of 7.4 million needed homes. The rental shortage is exacerbated as hundreds of thousands of new renter households enter the market each year, while the nation loses countless affordable units from the housing stock due to conversion to market rate rentals or condominiums, demolition, or obsolescence.”
At first it might seem as though “severely cost-burdened households” means poor people but that’s not entirely the case. Go to major metro areas with high housing costs and you can find people sharing apartments for the very simple reason that such units are unaffordable for large numbers of individual renters.
“In notoriously pricey New York, Los Angeles, and San Francisco, the median low-income wage will not even cover a low-end apartment: Median bottom-tier rents in those markets require 111.8 percent, 107.8 percent, and 99.9 percent of the median low-income wage, respectively,” according to Zillow.
We’re seeing fewer low-income housing units, in part because the cost per unit has gone up over time. But another problem is that low-cost housing options must compete for investor time and attention, a competition they’re losing.
Low Income Housing and Investors
There is federal help to make low-income programs attractive to investors, and for fiscal 2018 the Senate Appropriations Subcommittee on Transportation and Housing and Urban Development (THUD) has increased HUD discretionary funding by $1.4 billion. This compares with the 2018 Budget from President Trump that proposed cutting HUD’s finances by $6.2 billion. A final budget has not passed as of this writing so final funding for FY2018 is uncertain.
While funding issues for low-income housing are debated in Washington, the practical reality is that in a rising price environment rents also go up – and the National Association of Realtors says existing home values have increased for 65 straight months as of July. The result is that subsidy programs with limited funds buy less and less shelter because of rising costs.
“The low inventory of homes for sale – especially at the entry level – is driving up prices as demand outstrips supply in many markets,” said Rick Sharga, executive vice president at online real estate marketplace Ten-X.com. “The result is that we have more renters than ever before, and very limited vacancy among rental units across the country, which is driving monthly rental costs higher and higher.”
ATTOM Data Solutions reported in January that “making monthly house payments on a median-priced home — including mortgage, property taxes and insurance — is more affordable than the fair market rent on a three-bedroom property in 354 of the 540 counties analyzed.”
A second problem is that in many metro areas short-term rentals with such services as Airbnb have become an income source for a growing number of owners. As homeowners increasingly become hoteliers, their ability to collect rental income drives their property values up, a situation which locks marginal buyers out of the market and generally forces up local rents as well.
There has been some effort to limit short-term rentals. For example, New Orleans now has a set of regulations in place which limit short-term rentals, rules enforced by seven inspectors and the ability to level fines of up to $500 a day. In New York State, a 2014 report from the attorney general found that private short-term rentals in New York City took in more than $282 million, income homeowners did not have in the past.
What regulation really does is to legalize and legitimize short-term rentals where such an organized business did not exist at all just a few years ago. Not only are short-term rentals a challenge to hotels, they’re also growing a problem for low-income housing. Why develop low-income housing when a whole new field is opening up, one with the potential for strong profits? As an owner, why not rent rooms on the side and raise the value of your property, especially if you intend to sell in the next few years? Or, why not finance with a cheap owner-occupant mortgage and then rent a room or two to offset monthly costs? The answers, inevitably, will not increase the supply of low-income rental units or help those with few real estate options and little cash.