Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He is a university professor in the University of Toronto’s School of Cities and Rotman School of Management, and a distinguished fellow at New York University’s Schack Institute of Real Estate and visiting fellow at Florida International University.
After the housing-market crash, droves of people want to rent. But construction of new units hasn't kept up with demand.
For the past half-century or more, homeownership has formed the cornerstone of the American Dream. But ever since the economic crisis, America has been in the throes of a long-running Great Reset as it shifts gradually from homeownership toward renting. The number of “renter households” increased by more than half a million in 2013 according to a recent analysis on the state of the housing market from Harvard's Joint Center for Housing Studies.
A recent post over at the economics blog Sober Look suggests that the shift is occurring faster than even I expected. This huge growth in the renting population means that, in the coming years, America’s housing crisis will have less to do with foreclosures and underwater homes and more to do with rental housing, as the supply of these units is falling far behind growing demand.
The fact is that, even as more and more Americans want to rent, the market just hasn’t kept up. Sober Look pulled out some illuminating graphs from the FRED database (Federal Reserve Economic Data) maintained by the St. Louis Fed. Curious to dig in deeper to this rich dataset, I found four key charts from the FRED database that paint the broad picture of why the shortage in rental units is the looming crisis Americans must face.
The first tracks the growth in renter-occupied housing units (in thousands of units) from 2000 to the first quarter of 2014. It’s essentially a straight trend up, showing the growth in demand for renting.
The second charts the number of vacant housing units for rent in the U.S. over the same time period. The number tracked upwards for the first decade of the century, but the decline has been precipitous since the end of 2009.
The third shows the sharp decline in the rental vacancy rate over the past five years. Though the vacancy rate is still well above long-term levels since the 1950s, its downward trajectory again indicates growing demand in the face of constrained supply.
These patterns hold not just in the big coastal cities that we might think of as the epicenters of the rental crisis, as Sober Look pointed out. Vacancy rates declined in both the Midwest and Western census divisions, two parts of the country that we generally think of as having very different kinds of housing markets.
This supply-demand mismatch, as econ 101 tells us, results in skyrocketing rents.
The fourth and final graph shows the increase in the Bureau of Labor Statistics’ Consumer Price Index for “rent of shelter” from 2000 to 2014.
The trend is decidedly upward, aside from one tiny blip at the beginning of the recovery. Rents are going up and up as more people compete for a number of units that isn’t growing fast enough. The number of completed new housing units built for rental has grown slightly since 2011, but the numbers are still far below pre-recession levels—and even further below what we really need.
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In response to this problem, former single-family, owner-occupied homes in far-flung suburbs are being transformed into rental housing as a sort of stop-gap measure in some parts of the country. In others, rents just go up and up.
Renters are then, unsurprisingly, more “cost-burdened” than homeowners, according to the same Harvard Joint Center for Housing Studies report. About half of all renters were “cost burdened,” paying more than 30 percent of their income for housing, compared to less than a third of homeowners. And a whopping 28 percent of renters paid more than half of their incomes for housing.
Part of this may be due to underlying economic realities for these two groups. Homeowners, by definition, have enough savings and income to buy their homes, while many renters tend to have far fewer such resources. The Harvard study found that nearly half of the increase in renter households came from households earning under $30,000 per year.
These are the makings of a very different kind of housing crisis, one that is making affordability the real watchword of today’s housing market.