Real Estate

The next housing crisis

By From page HS4 | August 15, 2014

There isn’t a week that goes by that somebody doesn’t call me looking to rent a single family home. They have already searched craigslist and the local newspaper but what they find is either too expensive or already rented. Since my real estate practice doesn’t include property management, I refer them to some brokers and they are added to a long waiting list of applicants. It appears that while we have a sufficient selection of homes for sale, rental homes are few. Some housing economists believe this shortage will be America’s next housing crises.

Homeownership has always been a part of our heritage. Owning land and building a home inspired farmers and settlers to move west where land was affordable and abundant. In the last half century, our culture and a large segment of our economy has centered on Americans buying and owning their own home. Unlike some other countries where homeownership was limited to the privileged few, owning a home in America became a national priority — promoted through tax credits, mortgage interest tax deductions and today a nationalized mortgage industry offering mortgage rates subsidized by taxpayers. Too much of a good thing, however, had unforeseen consequences. Pushing homeownership on anyone with a heartbeat nearly bankrupted the country.

Since then, America has been rebooting itself as it gradually reformats from a society almost exclusively of homeowners or want-to-be home owners to more renters. According to Harvard’s Joint Center for Housing Studies, the number of “renter households” has increased 24 percent since 2008.

“There has been a tremendous increase in people renting,” says Chris Herbert, research director for Harvard’s Housing Studies. “Part of the surge in rental demand is caused by finances damaged by the Great Recession and those unable to obtain financing.”

The current demand for rentals will not level off. It’s just getting started. Some 15.3 million adults in their 20s and 3.1 million in their 30s are still living with their parents. As the economy improves, these adults are going to move out. New household formation that has been on hold should rebound. Demographic forces beginning in 2015 should create 1.3 million new households a year — up from 600,000 to 700,000 since 2007. Don’t expect these new householders to become homebuyers. They will rent first. And that’s the developing crisis. We simply don’t have the available rental inventory now, on the drawing board or in the pipeline to accommodate the anticipated demand. Much of what we have is either very expensive or in blighted areas.

According to the U.S. Census, the number of all vacant rental properties has declined 21 percent in the past three years. That trend is expected to continue. Here’s why. In addition to normal population increases and an anticipated surge in new household formations, we are beginning to see both mom and pop and the institutional investors unloading their rental homes and selling them to homeowners.

About 10 percent of all our housing stock are single family rentals. Most of these rental homes are owned by small mom and pop investors with the following profile. They own less than five properties, which they have owned for an average of 15 years, they have a high equity position and they are nearing or at retirement age. The other group of landlords are institutional — companies like Blackstone Group that own 44,000 rental homes, many in the Sacramento Region. These institutional investors began buying large blocks of distressed homes in 2011 and converted them into rentals. Both groups are beginning to liquidate their holdings further reducing the number of rentals available.

The situation of increasing demand for good homes to rent and a decreasing supply would normally be solved in a free market environment. Builders would simply build more homes and multifamily developments. With perhaps one exception in pricy El Dorado Hills, that’s not going to happen in our county for two reasons. The first is political. Every proposal for new housing anywhere is shouted downs by special interests screaming “save our rural environment.” The second factor prohibiting any new rental projects is that they are cost prohibitive. Permit and mitigation fees can easily run more than $50,000 per unit, not including land, engineering, finance, entitlements or construction costs.

Don’t look to the state or feds for help. Local development agencies once generated roughly $1 billion annually for below-market housing. That all disappeared when 400 development agencies were closed to ease a state budget crises in 2012. State and federal funding for below-market housing has plummeted 79 percent over the last five years, according to a study by California Housing Partnership.

With little new construction or tax subsidies to support below-market rents, the shortage of rental housing will be severe with sharp increases in rents. Historically, California rents have been substantially below where they should be. Landlords have been content to take advantage of high appreciation rates upon resale in return for a modest return on their investment. That’s going to change. So what’s the solution?

Builders and affordable housing advocates are finding some common ground. Both recognize a rental crisis is looming which can only be solved by increasing the supply. Christopher Thornberg of Beacon Economics offered his perspective when testifying at the State Assembly Committee on Housing. “You should limit the ability of neighborhoods to challenge projects, which can delay development for years, even decades. Until you deal with those problems, housing is going to be extremely expensive in California.”

Ken Calhoon is a real estate broker in El Dorado County. He can be reached at [email protected].

Ken Calhoon

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