Low-Income Rentals Migrating Out of Affordability

The number of affordable rental units available to low and very low-income households is falling according to a new analysis from Freddie Mac. Not only are fewer units coming on line (even as multi-family construction has returned to historically average levels), but existing units are migrating out of affordability. The company found increasing rents, stagnant household incomes, combined with potential changes to public subsidies on both the supply and demand side, are constricting the number of units that are both affordable to lower income renters and meet their specific needs for location and unit size.

Very low-income households (VLI) are those with incomes no greater than 50 percent of the local area's median income (AMI).  As rents rise without a corresponding increase in wages, households with lower incomes can't afford market rents.  To illustrate this, Freddie Mac looked at multifamily loans it had financed twice between 2010 and 2016.  About 97,000 units fell into this category and at the time of first financing, 11.2 percent were affordable by VLI renters and 71.3 percent by low-income (LI) households. By the second refinancing rents had increased so significantly that only 4.3 percent and 65.2 percent were affordable to the two populations respectively.

There were widely varying impacts across the nine states where Freddie Mac's Multifamily division financed the most rental units over the six-year period. In Colorado, for example, the percentage of VLI units fell from 32.4 percent of the 5,100 plus units to 7.5 percent, although the percentage of LI units did pick up some of the difference, rising from 67.6 percent to 82.6 percent. In North Carolina VLI units dropped from 9.8 percent to 0.3 percent.  In the two states where the percentage of VLI units increased, Florida and California, the change was in fractions of a percentage point.

Freddie Mac points out that, while the analysis was at two different points, they were close in time and there was no change in the population of units evaluated.  The VLI categorization assumes a household pays no more than 30 percent of its income on rents, but this assumption is less true as rents rise faster than incomes.

In addition to the flat trend of available VLI units in California, Freddie Mac says the number of units affordable to even median income households - those earning between 80 and 100 percent of AMI - fell sharply.  At the initial financing, 73.4 percent of the rental units were affordable to median-income renters, but that dropped to 39.4 percent by the second financing.

To verify the applicability of their findings to the broader market, Freddie Mac reviewed all the rental properties it funded from 2010 to 2016 and then trended rents using Axiometrics rent-growth data.  Exhibit 3 shows the number of units funded each year that qualified as VLI, using a population with consistent rules for counting affordability; the second table shows the change in percentage of VLI-affordable units year-over-year.  For each year following the initial funding, those same property rents are trended and tested against each respective year's VLI threshold. For example, of the 17,510 underlying units that qualified as affordable to VLI households in 2010, just 3,894 would have qualified in 2016, a drop of 77.8 percent. The drop is steeper in this analysis because all multifamily properties are trended across all years.

Freddie Mac said its annual funding goal for LVI units has been around 60,000 since 2012, but the percentage funded by its conventional business fell from more than 94 percent in 2012 to 34 percent in 2016. Much of the VLI lending has shifted to its Targeted Affordable Housing business which focuses on subsidized housing and its Small Balance Loan program, focused on properties containing five to 50 units and loans ranging from $1 million to $6 million.   These two business sectors funded 36 percent and 30 percent of the VLI units respectively in 2016.

The company says its property specific analysis bolsters other research which suggests worsening affordability in the rental market, a gap that will continue to widen if no action is taken. Even as affordable units are made available to lower-income renters, they won't stay that way for long if rents continue to grow at market-level rates.

Those participating in the multifamily rental housing market must understand market needs, Freddie says. "There are factors that make things difficult and are not easily controlled, such as land and construction costs. But as we source capital to the rental market, we need to look for opportunities to carefully target capital to build and maintain units that are affordable to lower-income households, especially those that have incentives to stay that way."