Housing affordability in the United States remains a critical issue. The for-sale home marketplace continues to price many would-be buyers out, causing rippling demand in the rental sector in response. However, renters in staggering numbers are unable to afford market-rate apartments. Current research demonstrates a worrisome trend at the heart of it all: Wage increases lag significantly behind the rapidly escalating costs of rent. Simultaneously, new construction for apartments has trended more toward luxury units in recent years, further deepening supply issues. What has become clear is that finance availability for existing affordable and workforce apartments is more important than ever to the nation’s housing supply. Preserving this type of financing helps ensure the problem isn’t exacerbated further.
Troublesome Market Dynamics
Even after 10 years of economic expansion and the lowest unemployment rate in decades, the share of renter households with cost burdens in 2019 was down just 4 percentage points from the 2011 high, according to the the Harvard Joint Center for Housing Studies. Currently, 10 million low-income renter households routinely spend more than half, when they should spend no more than 30 percent, of their income on rent. While 30 states, the District of Columbia, and numerous counties and municipalities have adopted minimum wages higher than the federal minimum, the average minimum-wage worker must still work nearly 97 hours per week to afford a one-bedroom rental home at fair market rate, the National Low Income Housing Coalition reports.
Renters, particularly those with the lowest income, have also taken the brunt of the economic fallout caused by the pandemic. Census Bureau Household Pulse Surveys show more than half of all renters lost income between March 2020 and March 2021. Seventeen percent were behind on rent early in 2021, including almost a quarter of those earning less than $25,000 and a fifth earning between $25,000 and $34,999, according to Harvard. In the third quarter of 2021, 15 percent of renter households were in arrears.
In addition to lagging wages, much of the country lacks a sufficient supply of units, particularly for extremely-low-income households. And though rental construction has been on the uptick in recent years, rising costs for materials, labor and land have pushed most new development toward the luxury market.
Commitment Remains Strong
Finance is a bright spot in the sector. Lenders are bullish on affordable apartments. The commitment of Fannie Mae and Freddie Mac to providing liquidity for affordable rentals has been further solidified over time.
Both agencies offer small loan programs for existing apartment properties serving lower-income Americans. These properties tend to be more affordable and concentrated in urban areas near transportation and employment. Fannie Mae’s Multifamily Small Loan program provides loans up to $6 million nationwide. Freddie Mac’s Optigo Small Balance Loans Program offers loans between $1 million and $7.5 million for apartments serving the nation’s workforce.
Impacts of Rising Rates
One aspect we are monitoring is the impact of the rising interest rate environment. After a long run of very low rates, the Federal Reserve began initiating a series of increases, the first landing in March, in an effort to combat a recent spike in inflation whose magnitude has not been since the 1980s. Fannie and Freddie, along with conduit finance providers, have had to adjust and, in all cases, finance rates have increased, though the rates are still low by historical standards.
Notably, Freddie Mac’s Small Balance Loan Program recently announced pricing increases but nevertheless has stayed below the pricing increases exhibited in traditional agency and CMBS spread-based lending. Freddie’s borrowers also benefit from a 35-business-day rate lock hold at no additional cost. Separately, Fannie Mae’s program is delegated to lenders, and they recently introduced some additional discounts, especially for highly affordable properties, to ensure finance activity continues.
Borrowers considering acquiring or refinancing in the near term should reach out to lenders now to understand what financing options are currently available, particularly in this rising interest rate environment. It’s important for borrowers to communicate their short- and long-term investment strategies with lenders to obtain proper advice and guidance.
Ann Atkinson is small balance loan and market real estate production manager for Sabal Capital Partners, LLC, a wholly owned subsidiary of Regions Bank.