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Fannie Mae EXCLUSIVE: The crisis in affordable rental housing, Part 1

Across America, millions of households are struggling to find a place to rent they can afford. Fewer than half will find affordable rental housing; fewer than one in four of our poorest renter households will do so. And even those who find a rental will likely face rent hikes in the near future that may eat up any increases in their income. This crisis threatens household stability, education, health, the environment, and the quality of our neighborhoods.

The cost of the crisis is very real to me. In the 1960s, my father lost his job. He got sick at the factory where he worked and he was not part of a union – our home was foreclosed on. We moved around a bit before we settled into public housing in South Philadelphia.

We were lucky. Our rental home was affordable; it was a safety net for us. But I saw so many others struggling to find jobs with decent wages, good schools for their children, and safe neighborhoods. All while grappling with the lack of stable, affordable housing.

At Fannie Mae, we provide affordable housing opportunities for renters and owners. It’s what we focus on every day. This focus gives us some insight into the causes and potential solutions to the current affordable rental crisis.

To help spark creative solutions, we must better understand the scope of the affordability problem, how we got here, and what some communities are doing to address the issues.

What it means to be cost burdened

More than one-third of U.S. households – about 44 million – are renters, and nearly 60% are classified as low income (households with income from 51% to 80% of the area median income or AMI), very low income (31% to 50% of the AMI), or extremely low income (below 30% of the AMI). These are the families most likely burdened by rent costs.Cost burdened chart

Households that spend more than 30% of their income on rent are considered “cost burdened.” While about half of all renter households are cost burdened, an estimated three-quarters of extremely low-income renters are in that category.

Households spending more than half their income on rent are considered to be “severely cost burdened.” About one quarter of all renter households fall in that category, yet that percentage soars to 59% of extremely low-income renters.

For every affordable unit added, two are lost

That’s because there’s a disconnect between the units being built (the supply) and who’s able to rent them (the demand).

While it costs about as much to build an apartment project for low-income tenants as a market-rate project, many builders are focused on projects that will command higher rents. According to the Dodge Data Analytics Construction Pipeline, about 343,000 apartment units were completed in 2016, with another 400,000 units expected to come online in 2017. Most of this new supply is high-income rentals located in large cities where Millennials are driving rental demand.

When it comes to new affordable units, about 100,000 are built each year on average, says the National Housing Trust. Yet the market supply is not going to keep up: For every new affordable unit added, two are lost from deterioration, abandonment, or conversion to market-rate housing.

Further, according to the National Low Income Housing Coalition, about 360,000 privately owned, federally subsidized units have been converted to market-rate housing since 1995, with another 10,000 to 15,000 units leaving this inventory every year. In addition, more than 2 million units are at risk of loss over the next decade.

How did supply dry up?

During the Great Recession, multifamily construction fell sharply. After the recession ended in June 2009, demand started to rise – both from previously displaced renters and from new Millennial first-time renters. However, multifamily construction didn’t rebound in a significant way until 2013, and has been playing “catch up” ever since.

In addition, construction of subsidized housing has declined as a percentage of all new multifamily construction and now represents only around a fifth of new construction annually – not enough to keep pace with demand.

Finally, costs of construction, including rising wages for construction workers nationally, have increased across the country, not just in strong metropolitan areas.

As a result, without a subsidy, developers are only willing to undertake new projects where they can generate higher rents.

Driving demand

Increased demand for rental housing stems from several factors. Millennials, those 75 million young adults born after 1980, are one of the biggest drivers of current rental housing demand. In record numbers, they are deferring homeownership, choosing to rent rather than buy. High-income renters, typically those who can afford to buy a house, are choosing to rent an apartment instead. They now represent more than 20% of all renter households. Collectively, this contributes to a 26% increase in estimated national rent levels since 2005.

Wage growth is starting to line up with rent increases

Wages and asking rent levels are two factors that play a big role in affordability. All other things being equal, it’s more affordable to rent when wage growth keeps pace or stays ahead of rent increases.

It looks like that’s starting to happen. Over the next two years, growth in household income is likely to outpace growth in asking rents by about 2%, cumulatively. But that’s based on projections showing that median household income might grow by nearly 7% while rent growth returns to more normalized levels in the 2 to 2.5% range.

Even so, this will contribute to only modest improvements in rental housing affordability.

What’s the answer? Check back tomorrow to find out how communities are working toward solutions.

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Freddie Mac: Cash-out refinance activity highest since the bust

This years is shaping up to outpace expectations thanks to a resilience in refinance demand, especially when it comes to cash-out transactions.

According to Freddie Mac’s May Economic and Housing Research Outlook report, 2017 is performing so well that its increased its 2017 forecast for mortgage originations by just over $200 billion and added $100 billion to our 2018 forecast.

The year started out with a surprise uptick in refinance borrowers took cash out, increasing to 49% in the first quarter of 2017, which is up from 44% in the fourth quarter of 2016.

Freddie noted that this is the highest share since the fourth quarter of 2008.

However, it cautioned that the data is still below the peak of 89% in the third quarter of 2006.

The data doesn’t come as a shock though given that home prices have long been on the rise. The Federal Housing Finance Agency’s latest home price report showed that seasonally adjusted monthly index for March was up 0.6% from February.

Looking at it from a different perspective though, even though the percentage of refinance borrowers taking cash out increased in the first quarter, the total dollar amount cashed out decreased. In the first quarter of this year, an estimated $14 billion in net home equity was cashed out, down from $19.1 billion in the fourth quarter of 2016.

But despite volume increasing in recent quarters, it is still below the peak of $84 billion in the second quarter of 2006.

Plus, continually low interest rates are majorly contributing the strength in the housing market. Mortgage rates for the 30-year fixed-rate mortgage reached as high as 4.3% in March.

Since then, rates have declined about a quarter of a percentage point to right around 4% where they have been holding in recent weeks. This won’t stick around forever though, as mortgage rates are likely to head higher later this year.

“Despite weak economic growth, housing got off to a good start in 2017 because low mortgage rates have given the spring homebuying season a pleasant surprise,” said Sean Becketti, chief economist with Freddie Mac.

“Mortgage rates started March just above 4% and have mostly drifted lower since then, even falling below 4%. With home sales, housing starts and home values up, 2017 is shaping up to be the best year for housing in over a decade,” said Becketti.

The chart below is an updated version on Freddie’s forecasts for the year, which includes real GDP, mortgage rates, housing starts and home sales. 

Click to enlarge

housing forecast

(Source: Freddie Mac)

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FHFA: Home prices continue climbing in first quarter

Home prices rose during each month of the first quarter, continuing a climb that began in the early part of this decade, a new report from the Federal Housing Finance Agency showed.

The FHFA’s House Price Index for March, which is the most recent data available, showed that seasonally adjusted monthly index for March was up 0.6% from February.

Overall, house prices rose 1.4% during the first quarter of 2017, the FHFA report showed. On a year-over-year basis, house prices rose 6% from the first quarter of 2016 to the first quarter of 2017.

“The steep, multi-year rise in U.S. home prices continued in the first quarter,” FHFA Deputy Chief Economist Andrew Leventis said.

“Mortgage rates during the quarter remained slightly elevated relative to most of last year, but demand for homes remained very strong,” Leventis added. “With housing inventories still languishing at extremely low levels, the strong demand led to another exceptionally large quarterly price increase.”

Low inventory is also a concern of the National Association of Realtors, as its latest existing home sales report showed that home sales fell in April and homes flew off the market at a rate not seen since 2011.

The FHFA report also showed that home prices rose in 48 states and the District of Columbia between the first quarter of 2016 and the first quarter of 2017. 

FHFA monthly home price index March 2017

(Click the image to enlarge. Image courtesy of the FHFA.)

According to the FHFA report, the top five areas in annual appreciation were: District of Columbia at 13.9% Colorado at 10.7%; Idaho at 10.3%; Washington at 10.2%; and New Hampshire at 9.5%.

The FHFA report also showed that among the 100 largest metropolitan areas in the U.S., the annual price increase in Grand Rapids-Wyoming, Michigan was the highest in the nation, at 13.7%.

Prices were weakest in San Francisco-Redwood City-South San Francisco, California, where prices fell by 2.5%.

Of the nine census divisions, the Pacific division showed the strongest increase in the first quarter, with a 2% quarterly increase and a 7.7% increase since the first quarter of 2016, the FHFA report showed. 

Additionally, the report showed that house price appreciation was weakest in the Middle Atlantic division, where prices rose by just 1% from the last quarter.

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