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«reNtal HousiNg Policy iN tHe uNited states Volume 13, Number 2 • 2011 U.S. Department of Housing and Urban Development | Office of Policy ...»

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Although the foreclosed owner-occupied stock may offer new opportunities for renters, the process of successfully transitioning large numbers of housing units from owner- to renter-occupied raises an important question: how fungible is the housing stock? In many growing, gentrifying urban areas in America, large numbers of rental properties have been converted to ownership properties, but there is far less experience with large numbers of ownership to rental conversions.

As stated previously, structures with one to four units account for 50 percent of the rental housing stock. A large fraction of these properties are owned and operated by small (mom and pop) investors.

Who will invest in and operate the one- to four-unit properties available in the foreclosed stock as rental units? The number and capacity of mom and pop investors may be too small to absorb much of the owner-occupied foreclosed stock that will transition to renter-occupied. Larger private and nonprofit providers of rental housing tend to develop and acquire larger properties and seem reluctant to consider smaller one- to four-unit properties. Some larger rental housing providers have argued that because of the unique characteristics of each property, management costs are too high with scattered site one- to four-unit properties. To take advantage of the opportunities available in the foreclosed stock, developers and managers of affordable and market rate rental housing will need to consider new approaches to acquisition, development, and management.

Successful examples of managing single-family rental housing do exist. The Cleveland Housing Network (CHN) has extensive experience managing a lease to purchase program where singlefamily homes are developed or rehabbed under the LIHTC. The homes are rented for 15 years, with the goal of transitioning the unit to homeownership in year 16. Currently, CHN has 1,800 homes under management and has sold 500 homes (Durban and Whipkey, 2011). For this portfolio of homes, a property manager is responsible for managing 125 to 150 homes, which is comparable to the number of units assigned to many multifamily property managers.3 Foreclosures in condominium developments are common in many markets and present a unique set of challenges. Unit owners threatened with the prospect of foreclosure have little incentive to pay condominium fees. Condominium associations have few options to recover monthly fees. In large buildings with a substantial number of foreclosures or small buildings with just a few, the remaining residents face a substantial burden to maintain the complex and sustain the level of amenities.

The CHN provided data on units per property manager to the author.

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In the existing multifamily rental stock, increases in the number of vacancies and foreclosures coupled with declines in property values, rents, and renter household incomes will certainly decrease the quality of this portion of the rental stock. Shilling (2010) found that, in the city of Chicago, net rental revenues are at or below total operating costs for about 74,000 rental units, or about 12.5 percent of the rental stock. Property managers facing stagnant or declining rents often face increasing costs in areas such as property taxes, insurance rates, and energy costs.

Rising energy costs are particularly a problem for the multifamily stock because of the age of the stock. Housing built in the 1990s is about 23 percent more energy efficient than housing built before 1960 and 17 percent more efficient than housing built in the 1960s and 1970s (Brown and Wolfe, 2007). Not much data are available on energy costs in multifamily structures, but the experience with public housing is well documented. Rising energy costs contribute significantly to the operating subsidy shortfalls in public housing. The U.S. Department of Housing and Urban Development (HUD) spends $4 billion on energy per year, which is more than 10 percent of its operating budget. In 2004, HUD reimbursed public housing authorities $1.3 billion for utilities, representing 22 percent of total operating expenses (HUD, 2008).

Improving the energy efficiency of the multifamily housing stock presents significant challenges.

Much of the weatherization and other public subsidy programs are focused on homeowners and are sometimes difficult to adapt to multifamily structures. In addition, owners and tenants face different incentives making it difficult to align the costs and benefits of investments in energy efficiency. Owners of buildings with individually metered units have little incentive to make investments to improve energy efficiency because most of the savings go to the tenants, not the owners.

In buildings where tenants do not pay utilities but control consumption, one study estimated that tenants set thermostats 1 to 3 degrees higher than tenants who pay utilities (Brown and Wolfe, 2007).

Managers of cash-strapped multifamily rental properties are likely to forgo maintenance, which will decrease the quality of the property over time. This filtering down of rental units may provide affordable housing opportunities for low-income households in the intermediate term, but if these conditions persist, units may be lost from the stock because of abandonment by property owners.

In markets with rising vacancy rates and declining rents that were overbuilt during the housing boom, the stock is expected to shrink as the market adjusts. Losing viable units because of a frozen credit market or declining incomes, however, raises concern about the long-term availability of affordable rental housing. When the distressed properties are concentrated in low-income neighborhoods that serve some of the nation’s poorest citizens, property abandonment can significantly decrease the affordable housing options available to low-income households and add to the blight of these neighborhoods.

Federal Response to the Crisis The federal policy response to the current crisis has focused almost exclusively on homeownership. The creation of two rounds of homebuyer tax credits and the various loan modification and foreclosure mitigation efforts have received much attention. The bailouts of Freddie Mac, Fannie Mae, commercial banks, investment banks, and insurance companies have focused on cleaning up the subprime mortgage mess.

64 Rental Housing Policy in the United States Rental Housing: Current Market Conditions and the Role of Federal Policy Renters displaced by foreclosures had no access to resources available to homeowners going through foreclosure and often had to move and find new housing with little notice. Congress enacted the Protecting Tenants at Foreclosure Act of 2009 to provide tenants with at least 90 days to move from a home that has been sold at foreclosure. If the tenant has a bona fide lease in place at time of foreclosure, the lease must be honored unless the new owner will occupy the unit as a primary residence. These tenant protections were set to expire at the end of 2012 but were extended to the end of 2014 in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Current conditions in the rental housing market suggest that foreclosures will continue to rise, which will have a significant adverse effect on renters and rental property owners. The Dodd-Frank Act requires that the Secretary of Housing and Urban Development develop a Multifamily Mortgage Resolution Program that will protect tenants and at-risk multifamily properties by creating sustainable financing, maintaining current levels of subsidy, providing rehabilitation funds, and facilitating the transfer of troubled properties to new owners—all of which will help maintain the affordability of the existing units.4 In the near term, existing housing programs could be modified or expanded to address the declining economic status of renters in this downturn and the precarious financial condition of an increasing number of rental properties. The housing voucher program could be expanded to include more eligible households. New vouchers could, for example, target renter households displaced by foreclosures, increasing their ability to find new housing. Vouchers spent on rents for vacant units, as well as those that allow renters to fully meet their rent obligations, could ease the cash flow problems facing many multifamily property owners. Providing vouchers to renters would likely have strong stimulative effects on the economy because low-income households have low savings rates.

Bringing the foreclosed one- to four-unit stock back into the market is a clear priority. Turner (2009) suggested that the Neighborhood Stabilization Program, which received $2 billion in funding under the ARRA, should be used to provide technical assistance to rental housing providers to convert viable foreclosed ownership stock to rental housing. These conversion efforts should focus on foreclosed units in “opportunity-rich” communities, where few affordable rental housing options exists due to land use restrictions. The LIHTC, the major federal housing production program, could be modified to provide incentives for developers to convert foreclosed stock to viable rental housing. In addition, the LIHTC could be used to encourage investments in the existing multifamily stock to improve energy efficiency or to reverse the disinvestment that may occur because of current market conditions.

The largest issue facing rental housing is the credit crisis and its implications for the multifamily mortgage market. In any consideration of the future of Fannie Mae and Freddie Mac, the needs in the multifamily mortgage market must be considered. The Dodd-Frank Act acknowledged the importance of the GSEs to the multifamily mortgage market by mandating that the Treasury Secretary conduct a study and develop recommendations to end the conservatorship of Fannie Mae and Fannie Mae, including an analysis of the impacts of housing finance reform on the financing of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Sec 1481.

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rental housing.5 The GSEs are essentially the only source of multifamily mortgages in the market today; with no signs of other providers on the horizon. Their current importance in the multifamily mortgage market does not mean that Fannie Mae and Freddie Mac must exist in their current form going forward, but rather that the multifamily mortgage market must be considered when the nation’s housing finance system is reconstructed. Rebuilding the multifamily part of the housing finance system requires more analysis of the state of the market nationally and in local markets.

The current dearth of publicly available data on the market could be mitigated by making the multifamily portfolio data from Freddie Mac and Fannie Mae available to researchers and policymakers. Given the level of taxpayer support of Fannie Mae and Freddie Mac, it seems reasonable that taxpayers benefit from the lessons learned from both firms’ experiences in the multifamily mortgage market.

Rethinking Federal Housing Policy The housing market crash has brought decades of federal housing policy into sharp focus. A critical examination of the role of government in the housing market is essential. It is time to rethink government intervention in the housing market by going back to first principles. Although promoting homeownership has been the centerpiece of federal housing policy for six decades, the current crisis clearly illustrates that homeownership is not for everyone. Owning a home is a significant investment that can be risky. Homeowners, like investors in any other market, need to have the resources to weather downturns in the market. It is crucial to target scarce federal resources to efficiently achieve policy objectives. In this reassessment of federal policy, all subsidies, whether direct cash subsidies or subsidies provided via the tax code, should be part of the discussion. What are the federal policy goals? How should scarce subsidies be allocated between rental housing and homeownership?

The mortgage interest deduction is the major subsidy to homeownership that, according to the Congressional Budget Office (CBO), resulted in a revenue loss of $80 billion in 2009 (CBO, 2009).6 In addition, the subsidy to the single-family mortgage market provided by the GSEs mounts as the bailout continues. In his article in this issue of Cityscape, Glaeser (2011) argues that it is time to rethink the homeownership subsidies. He argues that the results of the housing crash challenge the standard assumption that homeownership is a path to wealth accumulation, acknowledging that it is an investment that carries substantial risk. He also argues that the subsidies are regressive, because a disproportionate share of the benefits go to the wealthiest Americans and that the subsidies encourage the purchase of larger homes, which has resulted in increases in energy consumption, lot sizes, sprawl, and commuting times.

Another traditional argument for favoring homeownership is that homeowners have a stake in their local communities and therefore have an incentive to invest in social capital. DiPasquale and Glaeser (1999) provided evidence that homeownership encourages investments in social capital.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Sec 1074 (F).

CBO estimates the revenue loss from the deduction of state and local property taxes at $16 billion and the revenue loss from the capital gains exclusion at another $16 billion.

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Homeownership increases memberships in nonprofit organizations, voting in local elections, the ability to identify his or her U.S. Representative or school board head, and a willingness to help to solve local problems. They also found, however, that a large portion of the effect of homeownership on increased investments in social capital is due to lower mobility rates among homeowners, which results in longer tenure in the community.

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