Harvard University’s Joint Center for Housing Studies (JCHS) 2015 State of the Nation’s Housing report raised concerns that falling homeownership rates have created a drag on the nation’s housing recovery. While declining homeownership has adversely affected single-family construction and sales rates, demand for all types of rental housing continues to grow. This trend was a hot topic of conversation for a panel of industry experts during a webcast of the report.
Census Bureau data show that 2014 marked the tenth consecutive year of robust renter household growth. This puts the 2010s on track to be the strongest decade for renter household growth in history. According to panelist Chris Herbert, managing director of Harvard’s JCHS, since the 1970s, the average number of new renter households per year has increased significantly. Ten years ago, roughly 770,000 new renter households were formed every year. Four years ago, that average increased to 900,000. And last year, new renter households averaged just north of a million.
Some of this extraordinary renter household growth is coming from age groups, income levels, and family groups that were historically more inclined to own.
The rental market, which includes both apartments and single-family rentals, is seeing a larger number of older households as well as households with children entering the market. The largest increase is seen in the number of older renters; while households with a head of household aged 55 or older accounted for just 25 percent of all renters in 2014, they were a much larger percentage of overall renter growth - contributing to 42 percent of the renter household growth n the preceding decade.
Similarly, the number of “family households” rose over the decade, although single persons still make up the largest share of renter households.
The number of “family households” rose over the decade while the income distribution of renters is also shifting. Although higher-income households have historically been more likely to own, households in the highest income quartile accounted for nearly one in three net new renters from 2011 to 2014.
Regardless of the reasons, the share of U.S. households that rent their housing now stands at a 20-year high. This diversifying population of renters in turn is leading to a greater diversity of rental housing. “While apartments may be what first comes to mind when talking about renting, single-family homes make up the majority of rental stock,” said Hebert.
Rental markets will continue to adapt to this unprecedented surge in demand that began in the mid-2000s. According to the latest JCHS projections, individuals that are currently under age 30 will form over 20 million new households between 2015 and 2025, and most of these households will be renters. There will also be a large increase in renters over age 65 as more members of the large baby boom generation cross this threshold over the coming decade.
As the rental market has become more attractive, the byproduct of this is the lack of available apartment homes. High demand and limited construction activity has pushed national vacancy to its lowest point in almost 20 years. This supply-demand imbalance has resulted in a temporary increase in rents, which have climbed 3.2 percent in the last year.
As the increasing demand for rental homes improves the financial performance of rental properties, it is straining the budgets of many households unable to find units they can afford. There is key demand for middle- to low-income rental units as only 11 percent of renters were in the top income quartile in 2014 and nearly 40 percent were in the bottom income quartile.
To meet growing demand for apartment homes, construction of multifamily units has continued to recover from a historic low of just fewer than 110,000 in 2009 to 360,000 units in 2014-more than in any year in the 1990s or 2000s. Multifamily construction activity is evident in markets across the country. Over the past year, 18 of the top 25 metros issued more multifamily permits than in an average year in the 2000s. More interesting is that occupancy rates were high in the majority of markets where rents have been increasing the fastest.
However, even with this uptick in new apartment construction activity, the market is producing fewer than the estimated 300,000 to 400,000 new units that need to be produced annually to keep pace with demand.
An adequate supply of rental housing must be available to accommodate this upcoming wave of demand, and these rentals cover a broad rent spectrum. The rental market plays a critical role in meeting the housing needs of an expanding mix of households. Rental housing of all types continues to be home to a large majority of the nation’s low-income households, challenging the market’s ability to provide good-quality units that are within financial reach of renters of modest means. Closing the gap between what it costs to produce this housing and what economically disadvantaged households can afford to pay requires the persistent efforts of both the public and private sectors.