With the outlook for the U.S. economy continuing to improve, it is easy to believe we have finally put the Great Recession behind us. But, unfortunately, the deep fissures in our nation’s housing sector remain unhealed.
While reckless lending practices and over-exuberance in the homeownership market helped lay the foundation for the recession, today it is soaring rental demand, an acute shortage of affordable rental homes, and excessively restrictive mortgage underwriting standards that are making housing a growing source of distress and instability. Regrettably, millions of Americans now find themselves stuck between a rental market they can no longer afford and a homeownership market for which they do not qualify.
The scope and impact of this “silent” crisis in housing is too often overlooked and underappreciated by the media and our nation’s leaders.
Today, millions of American families live in homes that consume ever-larger chunks of their household budgets. According to Harvard’s Joint Center for Housing Studies, nearly 20 million families spend over half their incomes just on housing. More than one-third of all households, almost 41 million in total, pay in excess of 30 percent to cover housing costs.
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The housing cost burdens borne by renters are particularly severe. More than 11 million renter households, constituting 27 percent of all renters, now pay over 50 percent of their incomes for housing. In addition, 20.6 million renters, or half of the total renter population, pay in excess of 30 percent. These burdens are national in scope, affecting families in rural, suburban and inner-city areas. The combination of rising rents and stagnant incomes has made rental housing increasingly unaffordable for millions of families.
Those renters with the lowest incomes face another obstacle: the severe shortage of affordable and available rental homes. According to one estimate, there are only 29 such homes for every 100 “extremely low-income” renter households.
At the same time, large segments of the U.S. population remain excluded from the mortgage market altogether. Higher credit-score and down payment requirements have put homeownership out of reach for many who are nonetheless prepared to assume the burdens and risks of owning a home.
The national homeownership rate now stands at 63.9 percent, its lowest level in 20 years. The homeownership rates for Hispanic and African-American families have fallen precipitously from their pre-recession highs. Perhaps most significantly, the share of total home purchases by first-time homebuyers has hit a 27-year low, with student loan debt and higher rents among the factors making it more difficult for young adults to save for a mortgage down payment.
The double whammy of soaring rental costs and an exclusionary mortgage market will not simply vanish over time. In fact, absent remedial action, these problems are likely to worsen for a simple reason: demographics.
New household formation by millions of Millennials, many of whom stayed on the housing sidelines during the Great Recession, will contribute to already-strong rental demand. For the foreseeable future, many of these young adults will lack the resources to make homeownership a reality, particularly under today’s tight mortgage credit standards.
Adding to these pressures is the fact that America is becoming increasingly diverse, with minorities expected to account for some 77 percent of new household growth this decade. Renting will be the only housing option for many of these minority families, who typically have lower incomes and wealth than their white counterparts.
Consistent with these trends, the Urban Institute estimates that 62 percent of new housing demand will be rental during this decade, reversing the experience of past decades where most housing demand was felt in the ownership market.
While the situation is dire, solutions are possible.
The first step is to ask whether we have our priorities right. Through tax expenditures and appropriations, the federal government spends about $200 billion annually to support housing. More than 70 percent of this support is devoted to homeownership. In turn, about 75 percent of these homeownership subsidies benefit households with annual incomes in excess of $100,000, even though these households constitute fewer than 20 percent of all tax filers.
Are we striking the right balance in federal policy? What problems are we seeking to solve? In light of today’s market realities and America’s changing demographics, are there more effective ways to spend the limited pool of federal housing dollars?
Answering these questions forthrightly will illuminate the best way forward. But first we must end the silence and start asking the questions so that progress can occur.
Ron Terwilliger is Chairman and founder of the J. Ronald Terwilliger Foundation for Housing America’s Families and chairman emeritus of Trammell Crow Residential Company.