Affordable Rental Housing Demand Is Sparking Interest from Lenders

Mortgage & Real Estate

Affordability problems for renters has skyrocketed over the past decade both in the number and the share of renters facing them, according to a new report on rental housing from the Harvard Joint Center for Housing Studies that notes this is attracting investors and lenders to the sector, including some big banks.

Half of U.S. renters pay 30% or more of their income on rent, up 12 percentage points from a decade earlier, according to the Harvard report, Americas Rental Housing: Evolving Markets and Needs.

The share of Americans that rent has increased to 35%, up from 31% in 2004 marking the strongest numerical growth in renter households in the last 50 years, the report finds. A growing number of Americans not only are far from realizing the American dream of homeownership but are facing quality of life deterioration in the short and long term.

Assistance efforts have failed to keep pace with escalating need, says Chris Herbert, research director at the Harvard Joint Center for Housing Studies. The still-weak economic growth and job market recovery suggest more people may face rental affordability issues going forward, further fueling demand for affordable housing investments in single-family and multifamily rentals.

These changes also are creating new demand for affordable housing capital investment. Some investors have become more active in the foreclosure-to-rent single-family property market while others eye the changing landscape of multifamily finance, including low income housing tax credit financing.

Once the domain of smaller community-based banks and thrifts, multifamily market investing is now dominated by some of the largest banks, the report notes, citing MBA data that rank Wells Fargo and Chase as the nations top two multifamily lenders.

Multifamily loan originations and the outstanding multifamily debt increased roughly $28 billion, or 3.4%, from 2010 to 2012, mostly accounted for by Fannie Mae and Freddie Mac guaranteed debt. Bank and thrift holdings on multifamily debt also increased $3.5 billion at the end of 2012 to almost $255 billion and continued to grow in 2013, albeit unevenly and at levels that still are below the 2008 peak of over $280 billion.

Among others, state housing finance agencies appear to be well positioned to take advantage of market growth opportunities, according to Fitch Ratings, whose SHFA market 2014 outlook is stable for the first time in five years, thanks to housing program profitability and sound issuer financial ratios. At the same time state agencies are building more equity while deleveraging bond programs.

Improving housing market fundamentals due to home price appreciation and lower delinquency rates, combined with state housing finance agency efforts to diversify and improve their traditional business models allow these agencies to remain in business, originate loans that include LIHTC development loans, and sell them for securitization, explains Maura McGuigan, senior director at Fitch.

Rising home prices helped to revive household balance sheets and to expand residential construction so the housing sector is giving a needed boost to the economy, says Eric Belsky, managing director of the Joint Center for Housing Studies at Harvard, but long-term vacancies are at elevated levels in a number of places as millions of owners are still struggling to make their mortgage payments, and credit conditions for homebuyers remain extremely tight.

Rental housing supply continues to shrink, rents have climbed, and construction of new rental housing has picked up sharply, giving an important spur to the struggling residential construction market, but it will take time for these affordable housing shortage problems to subside, adds Belsky.

At last count, 20.6 million households were shouldering severe housing burdens, the report notes, while federal budget sequestration will pare down the number of households receiving rental housing assistance. The number of extremely low-income renters in the U.S. who earn no more than 30% of the area median income more than doubled from 1.9 million in 2001 to 4.9 million in 2011.

Overall, renters facing severe burdens or paying more than half their income on rent increased to 27%. This is much higher than a decade ago when at 19% the share of American renters paying half their income on housing was considered cause for serious concern, he says. Data indicate longstanding housing affordability challenges should be among the nations highest priorities.

Mortgage industry veterans have been talking about an affordable housing crisis for years before the foreclosure crisis erupted in 2007. Solutions, however, have always been a challenge.

The report finds that housing markets have adjusted dynamically to the decline in homeownership rates and the increased demand for single-family rentals, with about 3 million existing homes switching from owner to rental occupancy from 2007-2011 alone.

Data indicate the growing needs of an expanding rental housing population should be considered a front-burner issue, notes Julia Stasch, VP of U.S. programs at the MacArthur Foundation, which provided principle support for the report as part of its $150 million Window of Opportunity, Preserving Affordable Rental Housing initiative.

The foundation has invested more than $300 million in grants and below-market loans to preserve and expand affordable housing and to support more balanced housing policies that acknowledge the importance of affordable rental housing to a full range of incomes, according to the foundations website. It is now calling for more active public/private cooperation to develop sustainable affordable housing.

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