More Americans Struggle with Rent as Land Prices Skyrocket
- Jun 06, 2019
America’s housing woes are growing more dire by the decade. The percentage of rent-burdened households nationwide rose from 17 percent in 1997 to 26 percent in 2017, according to a new report by Berkadia, which finds that the affordability crisis is not limited to the big cities and the downtrodden.
Moreover, the pace at which households are falling into the rent-burdened category—where monthly net rent exceeds 30 percent of household income—is accelerating. The rent-burdened percentage of households grew by 500 basis points in the 2007-2017 period (21 to 26 percent), compared to 400 basis points in the prior decade.
Between 2012 and 2017, it was households earning between $35,000 to $49,999 annually that were hit hardest by the trend. Out of these households, comprising the middle- and lower-middle-income bracket, the percentage of rent-stressed families climbed by 610 basis points. Even the rich are feeling the pain, with the rent-burdened percentage of wealthy and upper-middle-income households growing by 90 basis points.
Although the crisis is believed to typify major coastal metros like New York City, Boston and Los Angeles, rental agony is spreading to the heartland. Cities like Tulsa, Okla., Columbus, Ohio, and Omaha, Neb., have joined the leagues of unaffordable towns, with rent payments putting a serious burden on more than 40 percent of residents.
Soaring land costs are among the chief reasons that more and more Americans are struggling to put roofs over their heads. The report cites data from the Lincoln Institute of Land Policy showing that the cost of land skyrocketed by 76 percent from 2000 to 2016.
“The trend has been movement from the suburbs to the city and towards more transit-oriented development,” noted Steve Ervin, senior vice president & head of HUD production at Berkadia, to Multi-Housing News. “This trend has put smaller in-city parcels at a premium and has helped drive some of the increase in land cost.”
“Real estate has always been a strong investment vehicle—however, investors are increasingly more willing to accept lower returns, thus they will pay more for the land and property,” he added. The executive also noted that consistently low interest rates for the last decade-plus have allowed for investors to pay more and still make a suitable return, driving up land prices and with them rental rates.
Other drivers of the housing affordability crisis include a supply shortage in most cities; a growing preference for renting; rising construction costs, which climbed by 5.6 percent in 2017 alone; an increasingly complex and costly development process; and a reduced corporate tax rate, which means that banks and major investors have less incentive to pursue tax credits.
When asked what can be done to tackle the crisis, Ervin replied that many solutions must be brought to bear. The core problem to be addressed is that overall, the cost of building a new rental unit has grown faster than incomes, a disconnect caused by lack of sufficient supply.
Local governments can chip away at this by reducing the cost of permitting necessary to get an apartment built. On the federal level, the Low-Income Housing Tax Credit program can be modified to enhance the value of the LIHTC, thereby helping to close funding gaps for the construction of new homes.
Ervin also suggested the financing sources must continue to modernize to curb the cost of financing a property while speeding up the process. And new construction methods should be pioneered to create efficiencies without sacrificing quality.