Repairing the Low End of the Rental Market

For those looking at national data on rental housing, it’s a perplexing time.

In several large cities nationwide, upscale rental housing goes without tenants as young affluent renters turn into homeowners. Yet low-income rentals are getting so hard to find that often only connections through friends and relatives yield a clean, moderately priced apartment.

This mismatch of housing availability and housing need is a result in part of haphazard federal housing policy and in part of sharp shifts in the housing market caused by interest-rate changes.

Developers tell us that in the early part of the 1980s there was a boom in upscale rental housing, mostly in the suburbs. This occurred in response to the generous tax incentives for housing construction contained in the 1981 federal income-tax legislation and the surge in young households who chose to rent because high interest rates priced them out of homeownership. In many markets the boom actually resulted in overbuilding. When interest rates fell in 1986, a large number of young renters seized the chance to become homeowners, further weakening this portion of the rental market.

At the other end of the market, over a somewhat longer period, 2 million units renting for under $250 per month were lost through demolition, conversion to condominiums or upgrading.

Between these two extremes vacancy rates are more moderate, but even this housing is too expensive for many renters.

It’s decent, low-rent housing that is needed. The accent is on low rent. With the median family income of renters in 1986 at only $15,300 (compared with about $29,000 for homeowners), the median renter can support a rent of $318 with one-fourth of his or her income. Today, 40% of all renters under age 65 and 85% of those below the poverty line spend one-third of their income on housing (excluding those living in government-subsidized housing).

There are plenty of upscale suburban rentals available, but unfortunately the people seeking rentals are lower-income, often central-city, residents. For many renters, even the apartments available in the central city are the wrong types--one- and two-bedroom units versus the three- (or more) bedroom units that they need. This difficult situation is made worse by racial discrimination, which discourages minorities from even looking outside predominantly minority areas.

There are numerous signs that the rental market is very tight. From 1981 to 1986 rents rose 15% faster than the consumer price index; families are spending an increasing share of their income on rents; some are homeless because they cannot find affordable housing. Moreover, analysts expect that the tax changes of 1986, which eliminated some of the biggest incentives for investment in rental housing, will cause the rental market to become tighter over the next several years.

These national data, however, mask sharp regional and local differences. For example, over the 1981-86 period, rent increases in Buffalo, Cleveland and Detroit grew about 12% faster than the price index, but in Los Angeles they increased 29% faster, in San Francisco 36% and in Boston 25%. And even local markets are not homogenous. In 1985 the vacancy rate for units offered for rents of $150 per month or less was 3.7%; the comparable figure for those renting for more than $500 per month was 6.8%. We believe that the divergence in these rates has increased since 1985.

What should be done for the rental market?

Most economists would argue that eventually the rents on the now overabundant luxury units will fall within reach of those searching for affordable units. But it is not clear that local housing markets work smoothly enough for this to become a reality any time soon. Many of the luxury apartments are in the wrong place, and their rents would have to fall by half to be affordable to most renters.

Because there are relatively more units available in middle rent levels, and because poor renters are spending high shares of their income on housing, it would make sense to augment what they can afford through housing allowances (or vouchers). Federal programs of this type already assist nearly 1 million households. They could be expanded quickly by simply sending additional vouchers to local administering agencies, like public housing authorities and some state agencies, to provide the help needed in most markets.

Overall, there are more apartments and houses on the market for rent now than at any other time in recent memory. But in the few areas that are tight for low- and moderate-cost rentals, some production incentives for suitable housing are appropriate.

With the present array of assistance available through income-tax credits and tax-exempt bond financing, we do not need the expensive construction programs favored in the 1970s. Rather, the addition of limited federal subsidies should be enough to encourage the rehabilitation of existing units and the development of new housing. Perhaps the most difficult problem will be for Congress to limit this assistance to the cities and counties that really need it.