Thinking outside the bubble: the benefits of rental housing

South Florida CEO,  Jan, 2008  by Ken Naylor

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With the focus on for-sale housing during the past several years and subsidies that encourage buying over renting, rental development has been neglected, creating an unhealthily skewed market.

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The commonly heralded social and economic benefits of homeownership, indeed the biases toward it in public policy and public sentiment are pervasive. But many South Floridians, overleveraged and unable to sell their homes, are now confronting the downside of the "American Dream." Approximately 67 percent of the region's residents are homeowners, up from 64 percent in 2000 and 60 percent in 1990, according to the US Census Bureau's 2007 survey. Predictions are rampant that the hangover from South Florida's "bubbly" real estate market will be one of the worst in the nation.

Yet, housing incentives remain weighted toward ownership: The federal government hands out five times more in total tax breaks and subsidies to homeowners than it does to renters and rental property owners. Subsidies, however, can induce artificial demand, because not everyone is ready for homeownership. Rental housing, on the other hand, has seen its subsidies reduced or go unused. During the past several years in Florida, hundreds of millions in combined federal and state rental subsidies have been lost because dollars collected from taxes on real estate transfers for the State's Housing Trust Fund are being diverted into the State's General Revenue Fund. The State of Florida Housing Trust Fund program, which was implemented to accommodate the state's growing population--especially the lower income population--was designed to encourage local governments to partner with the private sector to respond to Florida's current housing needs. Through density and use restrictions and steering housing subsidies to developers of for-sale properties, municipalities hinder rental development, too. Individuals who resist rental developments in their neighborhoods make it more difficult for developers to win entitlements.

Although there are clear benefits to a community with a high percentage of homeowners--social stability, community orientation, wealth-building potential--there are unintended consequences from these initiatives as well. During the recent homeownership boom, for example, as the cost of buying a home increased, pricing pressure crept up the income ladder, turning an affordable housing crisis into a workforce housing crisis.

At the same time, new rental construction slowed to a relative crawl in South Florida thanks to skyrocketing land and construction costs. Now, with fewer rental properties in the region and the homeownership market faltering, South Floridians are left pondering what form of growth would best suit the community. New rental housing--especially transit-oriented infill development--is a necessary component of a thriving economy and can provide a better growth pattern.

A surprising rental demographic

Homeownership is generally thought to be a stabilizing and enriching force, but rental housing also serves dynamic segments that are essential for a growing economy. These include young people, families who are transient because of career requirements, new arrivals to the community and low-income households--all demographic groups who tend to move more often than the average.

Sixty percent of households headed by someone younger than the age of 35 rent. Renting makes sense for individuals whose careers make them more transient or anyone who is building up financial capabilities. Many people move for career or family reasons, and new arrivals take time to gain an understanding of school options, traffic patterns, lifestyle choices, and value propositions of different locations before committing to purchasing a home. At a minimum, groups that move more often need to overcome the high transaction costs of homeownership (brokerage fees, doc stamps, loan origination fees, legal fees, etc.) more frequently than others do.

Low-income households are particularly suited to renting. Homes that are affordable to low-income buyers are often located in less marketable areas, whereas rental units in their price range may be in more desirable locations. Homeownership can also be a trap in market downturns (a diversified investment portfolio is hardly an option when more than half of your income is depleted by mortgage costs). A 2004 University of Washington study demonstrated that homeownership can actually limit upward mobility, as low-income households are less likely to move in pursuit of job opportunities.

Most dramatically, low-income households have less income-tax liability and therefore realize much less benefit from mortgage interest deduction than wealthier families. Unfortunately, the steady pressure of our housing policies have pushed more and more low-income families to invest in homes, bringing many overleveraged households to the brink of financial ruin and driving up prices for homes that attract more financially capable first-time homebuyers. In the subsequent cooling off, both groups' investments are likely to suffer a massive loss of value.