MBA Paper: Demographics, Economy Drive Reduced Rental Housing Affordability

A new report from the Mortgage Bankers Association’s Research Institute for Housing America details how household formation among Millennials–one of the largest generations in American history–and potential homeowners shifted to rental market during the worst of the Great Recession combined to create our current affordability crisis in rental housing.

The report, Diverted Homeowners, the Rental Crisis and Foregone Household Formation, analyzes “various supply and demand factors that have led to this crisis’ and provide “detailed analysis of the shifts in homeowner and rental demand.”

“Demand for rental housing has greatly outstripped supply, rapidly pushing vacancies down and rents up even as incomes fell,” said Lynn Fisher, RIHA Executive Director and MBA Vice President for Research and Economics. “We are still trying to catch up.”

Fisher noted in the middle of the past decade, just as Millennials were anticipated to begin forming their own households and increase demand for rental housing, the supply side of the market stalled due to the turmoil in credit markets. “At the same time, homeowners diverted from ownership piled into the rental market,” she said. “The single-family rental sector certainly grew, but was only able to accommodate some of the increase.”

The RIHA analysis was conducted by Dowell Myers, Gary Painter, Hyojung Lee and JungHo Park of the Sol Price School of Public Policy with the University of Southern California.

“The most visible indicator of the rental housing crisis is the record-high affordability problem created by rising rents while renters’ incomes have declined,” the paper said. “Yet the evidence presented in this report suggests the root of the problem is that many more renters have been added than was expected according to the trends before 2006. Growth in renters came from the arrival in adulthood of the large millennial generation, but an even larger source of growth came from would-be homeowners who were diverted into renting.”

Other key findings:

–A sharp downturn in homeowner growth since 2006 suggests that 6.0 million would-be homeowners (the expected number compared to actual) have been shifted to renting or have left the housing market.

–These households triggered a cascade of adjustments throughout the rental housing sector that are measurable in different ways.

–A sizable portion (nearly one-third) of the diverted homeowners likely have been absorbed into single-family rentals, especially among households aged 25 to 54.

–Although larger than expected, growth in the rental sector (including single-family rental) was too small to account for both the expected rental growth and also the large number of diverted homeowners. Before disruptions to the owner-occupied market, the rental sector had been expected to grow by 4.4 million occupied units after 2006, due to the arrival of the large Millennial generation. While diverted homeowners resulted in demand for nearly 6 million additional rental units, rental housing only grew by 5.2 million.

–New construction was crippled during the financial crisis and aftermath, slowing its response to the swelling rental demand, although multifamily construction volume nearly doubled in 2012 compared to 2010, and increased another third in 2014 compared to 2012.

–The clear inference is that slightly more than 5 million otherwise-expected renters left or never entered the housing market, their growth displaced by the diverted homeowners, and diminishing overall household growth far below expectations.

–A further consequence of the resulting increase in demand and shortfall in supply in the rental market was an increase in rents, with rental affordability problems surging to record heights in 2010 and 2012. This dynamic created an increased incidence of high rental cost burdens that was remarkable for its relative uniformity across the nation.

–Detailed analysis of nine selected large metropolitan areas finds several nuances among broadly similar trends:

—-Nationally, there were 7.4% fewer owner-occupied homes in 2012 than would have been expected, with the greatest shortfalls found in Phoenix (-14.1%) and Los Angeles (-12.8%).

—-The number of rented single-family homes in 2012 was greater than expected by 22.1% in the nation, but was 103.8% greater in Phoenix and 56.5% in Atlanta, while only 6.9% greater in Los Angeles.

—-Compared to a national shortfall in the housing market in 2012 of 4.3% fewer households than expected given actual population growth, even greater shortfalls were observed in Los Angeles (-6.5%), Houston (-5.9%), and Washington, D.C. (-5.8%).

The paper can be accessed at

RIHA’s chief purpose is to encourage and assist–through grants to distinguished scholars and subject matter experts, educational institutions, research facilities and government organizations–establishment of a broader based knowledge of mortgage banking and real estate finance. In addition to Cognition and the Housing Behavior of Older Americans, you can find additional papers ers on RIHA’s revamped website: