The Long Tail of the Housing Crisis

Millions of Americans are feeling a housing crunch that persists more than a decade after the housing crisis hit. The current situation, however, looks like the market of a decade ago has been turned on its head. Rather than a glut of homes and falling house prices that lead to foreclosures and mortgage defaults, today there is a shortage of all types of housing — single family homes and apartments for rent — in virtually every city across the country.

Wanted: 4 Million Homes  

Housing markets are tight because new construction of total housing units, including both single-family homes and apartments, has not kept pace with population growth over the past decade. It takes 1.25 million or more total housing starts per year to meet the housing needs of a growing population. Following the crisis, however, construction fell below 600,000 per year and rose only gradually to reach 1.25 million in 2018. That is, during the decade since the housing crisis hit, total housing construction has been 3 million to 4 million units less than what a growing population would need.

The shortfall of home and apartment construction pushed vacancy rates low, and also resulted in a “pent-up demand” for housing in the form of millions of people who are sharing their living space — with parents, children, non-family roommates — at a time in their lives when they would normally have a home or apartment of their own. As the job market has recovered and many of these people began seeking a place of their own, rising demand but a scarcity of apartments to rent or homes to buy have pushed rents and housing prices higher and higher.

Rental Nation 

Homeownership rates plunged during the mortgage crisis a decade ago, from a peak near 70 percent prior to the crisis, to a low of 63 percent in 2016. Millions of households went from being homeowners to renters, while others stayed in a rental when they might have considered buying a home, had market conditions been better. During this period, roughly half of the increase in rental households did not rent an apartment but rather were renting a single-family home.

It made a lot of sense to rent a home rather than an apartment as many of these households needed the larger space and additional bedrooms in a single-family structure, as well as the location near schools and places to play outdoors, but without the financial requirements for homeownership. The number of single-family rental homes rose from 11.7 million in 2007 to 15.3 million in 2016, a 30 percent increase. The drop in the homeownership rate and corresponding increase in single-family rentals was a manifestation of the underlying financial weakness that millions of households experienced during the crisis a decade ago.

Homeownership Bottoms Out

The homeownership rate took a long time to bottom out following the end of the financial crisis a decade ago, as household financial positions were slow to recover. Indeed, the homeownership rate continued drifting lower, from 67.2 percent at the end of 2009 before reaching bottom at 63.1 percent in 2016. Since then, however, homeownership turned up, rising to 64.6 percent at the end of 2018. The number of single-family rentals also began declining over this period, as an improvement in household financial positions allowed many households to consider a home purchase.

More recently, however, these improvements appear to have stalled. The homeownership rate turned down again in the first half of 2019, posting consecutive quarterly declines in the winter and spring as the number of owner-occupied households declined while rental occupancy jumped again. This suggests that economic conditions in 2019 have put the brakes on a housing market recovery that was gaining steam in 2017 and 2018.

Two factors in particular are likely to be weighing on homeownership rates and the housing market. First, there is still a limited supply of homes to buy, a result of the construction trends discussed above. The second, which is a direct result of the limited supply, is that rising home prices and rising apartment rents have crimped affordability. Household income growth has not kept pace with housing prices or apartment rents. Not only has this put homeownership out of reach for many would-be homebuyers, it has also damped the improvement in financial position of renter households.

Solving the Housing Shortage 

What are the possible solutions to the challenges faced by today’s housing and rental markets? Increased construction of new homes and apartments will undoubtedly be a large part of the answer. There is already a lively national debate about ways to encourage construction, which gives one hope for the future.

In the meantime, however, millions of households need suitable places to rent. Real estate investment trusts, or REITs, are among the largest institutional investors in the single-family rental market. Single-family rental REITs bring professional management to a segment of the housing market that had long been dominated by mom-and-pop operators, helping improve the choices among rental housing options. In addition, apartment REITs own and operate rental apartments in cities across the country. The growth of manufactured housing, another sector with a strong REIT presence, provides an additional lower-cost housing alternative.  

Calvin Schnure is the Senior Economist at Nareit. He is a former economist for the Fed, the IMF, Freddie Mac and JPMorgan. Calvin analyzes developments in the macro economy and their impact on REITs and commercial property markets, and on financial returns to REITs.

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