«reNtal HousiNg Policy iN tHe uNited states Volume 13, Number 2 • 2011 U.S. Department of Housing and Urban Development | Office of Policy ...»
Sinai and Souleles (2005) argued that homeownership is a hedge against rent risk. Most owners (those with the very common 30-year fixed-rate mortgage) face constant mortgage payments while rents adjust annually. Could the community benefits often attributed to homeownership be achieved in rental housing with longer term leases? The increased mobility of renters with shortterm leases provides substantial benefits in terms of pursuing economic opportunities. However, for households at a stage in life where increasing the length of time in one community is preferred (for example, a family with kids in school), a stable rental situation could be very attractive. Longer rental contracts would also benefit landlords by decreasing the costs of frequent tenant turnover.
Why have long-term leases not become a readily available option in the marketplace if there are potential benefits to both the tenant and the landlord? Although the concept is very simple, the details are not. What would be a reasonable penalty for breaking a lease before the end of the term? Under what conditions could the renter break the lease with no penalty? What happens if unit condition changes during the term of the lease? How much would a landlord save with less frequent turnover? Both the tenant and the owner would need to fully understand the risks and rewards of the longer term lease. Federal policy could play a very important (and inexpensive) role in exploring the viability of longer term leases by setting up a pilot program to experiment with standards for such leases and providing incentives for rental housing providers to experiment with longer term leases as a tool for building stable, long-term rental communities. Federal policy provided just this type of leadership in developing mortgage standards that led to the widespread acceptance of the 30-year fixed payment mortgage, including standards for prepayment penalties.
The basic rationale for federal involvement in rental housing has centered on the goal of ensuring a safe and affordable living environment for poor households, the elderly, and the disabled. Assisting these vulnerable populations and ensuring the availability of housing with the necessary services required by special needs populations, are worthy endeavors. A fundamental difference between the subsidies for homeownership and those for rental housing is that homeownership subsidies are entitlements while subsidies for renters are discretionary. The mortgage interest deduction is available to anyone who files a tax return and decides to take the deduction. Any homebuyer who qualifies for a Fannie Mae or Freddie Mac conforming loan receives the benefit of a lower interest rate because of the implicit subsidy to the GSEs. No eligibility criteria exist, which means that the subsidies to homeowners are provided regardless of income or wealth. Recipients of rental housing subsidies must qualify by having income below program limits. In addition, rental assistance programs are subject to budget limitations, which means that not all eligible households receive subsidy.
Currently, only about 23 percent of those eligible for rental assistance in the United States actually receive that assistance (Turner, 2009).
The largest rental housing subsidy program is the Housing Choice Voucher; in 2009, CBO estimates that $16 billion was spent on vouchers. Public housing is the second largest program, costing
taxpayers $11 billion in 2009 for operating expenses, capital improvements, and limited new construction, largely under HOPE VI. The LIHTC resulted in a revenue loss of about $6 billion.
Vouchers have become the centerpiece of federal rental housing policy during the past three decades, offering flexibility to recipients in choosing housing and neighborhoods. Vouchers can be short term or longer term, and the program can grow and contract as the needs of the target population change.
Taxpayers have made substantial investments in public housing and in privately owned subsidized stock during the past six decades. The nation’s affordable housing stock is a valuable, long-term, national asset that serves working low-income families and the poorest members of U.S. society.
Housing units are long-term assets that require significant investments over time. At this point, a substantial portion of resources available for rental housing is committed to maintaining the existing stocks of units created by programs that are no longer active (DiPasquale, Fricke, GarciaDiaz, 2003). Allocating resources to build housing assets in particular locations is a long-term commitment not easily undone. Such commitments make it difficult to reallocate resources to address changes in the housing market like those experienced in the current housing crisis. Future long-term commitments to building housing assets should be carefully considered with a critical assessment of their long-term value.
With rental vacancy rates near historic highs, downward pressure on rents and the growing foreclosed housing stock, subsidized new construction is difficult to justify in most markets around the country. Yet, new construction continues under the LIHTC program. The program could be modified to limit new construction to only markets where a demonstrated need for new units exists. Additional modification could be made to give priority to projects that would repurpose the foreclosed stock or those that would provide investment dollars to preserve at risk rental properties. Tax credits and other subsidies are allocated on the basis of population rather than market conditions. Although the political advantages of allocation by state based on population are clear, such allocations can result in scarce subsidy dollars going to markets that have little need while markets where conditions are much worse, have too few resources. Allocating tax credits (or other federal funding) based on market conditions and needs rather than on population would result in better outcomes.
With the current crisis, a consensus is emerging that homeownership is not for everyone. This consensus provides an opportunity to strengthen both the rental and owner-occupied housing markets. Putting rental and owner-occupied housing on a level playing field will broaden the housing choices available to all households. Ending the preferred status of homeownership will give households a clear choice in selecting the tenure that best matches their financial situation and their stage in life. Rental housing could be viewed more broadly as long-term housing rather than a stepping stone to homeownership.
As federal housing policy is revamped, all direct subsidies and subsidies for housing provided via the tax code must be reconsidered. Scarce subsidy dollars should be targeted to the neediest in our country. The full costs and risks to taxpayers of any long-term commitments whether for building subsidized housing units or the new housing finance system must be assessed before making such commitments.
Acknowledgments The author acknowledges the helpful comments on a previous draft provided by Michael Murray, Vicki Been, and two anonymous referees. The author is responsible for any remaining errors.
Author Denise DiPasquale is the president of City Research.
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70 Rental Housing Policy in the United States Rental Housing Affordability Dynamics, 1990–2009 Rob Collinson U.S. Department of Housing and Urban Development
AbstractHousing is the single largest expense for most American families. For one-third of American households, this expense is not a monthly mortgage payment to a lender, but rather a monthly rent payment to a landlord. Rental housing is the typical tenure choice for the young, the elderly, the disabled, people in highly mobile professional sectors, and low-wage working families, it is also likely to be an important alternative—at least in the short term—for many of the millions of families uprooted by the foreclosure crisis.
In light of the potential increased role of rental housing as a tenure option, this article attempts to (1) describe key facts and trends in the affordability of rental housing for low- and moderate-income renters from 1990 through the recession of the late 2000s and (2) examine early evidence on the effects of the recession and foreclosure crisis on rental housing affordability. Although Harvard University’s Joint Center for Housing Studies (JCHS) and the U.S. Department of Housing and Urban Development’s Office of Policy Development and Research (HUD PD&R) have made important empirical contributions to the understanding of rental housing affordability trends during the past two decades, few studies have analyzed both national level and metropolitan level rental housing affordability dynamics.1 This article is intended to provide a data-rich update on rental housing market dynamics at both the national and metropolitan levels, drawing on a variety of data sources to provide a more nuanced picture of housing trends and needs. The content is organized as follows: the first section, Renter Income Trends, analyzes trends in renter incomes at the national and metropolitan levels since 1990;
the second section, Rent Trends, describes rent trends from 1990 through 2009; and the third section, Affordable Rental Housing Stock Trends, examines trends in rental housing affordability, as measured by rent burdens and affordable supply gap.
See JCHS (2008) and Eggers and Mouman (2008) for an overview of national rental housing cost trends.
Renter Income Trends The following section describes trends in renter incomes since 1990. First, broad macro renter income trends are explored, and then individual metropolitan-level trends are examined.