What can the Great Recession teach us about rent affordability in the age of Coronavirus?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief to some homeowners. But what about renter households?
In the wake of the COVID-19 pandemic, millions of Americans have lost their jobs and are struggling to make rent payments.
In today’s WatchBlog, we look at government actions in response to the coronavirus that affect renter households and the rental market, including how current rental market conditions compare to those from the Great Recession.
You can also tune into our podcast with GAO’s top housing expert Daniel Garcia-Diaz to learn more about rental housing trends.
What makes rent unaffordable?
Rent is considered unaffordable if households pay more than 30% of their income for it. For decades, rent costs have risen faster than income, which has made rent unaffordable for a growing portion of households in the U.S., particularly those with low incomes. Low wage growth among lower-income households and increasing costs to build new apartments have long contributed to this rising unaffordability.
How did the Great Recession impact rent affordability?
The Great Recession (2007 to 2011) led to higher rents because of an increased competition for affordable units and a limited supply of new affordable units:
- Millions of households lost their homes to foreclosure during the recession and became renters. Impacts to these households’ credit scores along with tighter mortgage underwriting standards have kept many in the rental market.
- Millennials, many of whom entered the job market around the time of the recession, had to compete for fewer opportunities. Poor economic conditions delayed homeownership and kept them in the rental market longer than previous generations.
- The construction industry, which contracted during the recession, struggled to build enough new rental units to keep up with demand. Most of the rental construction following the crisis concentrated on high-rent, luxury units.
How could COVID-19 impact rents?
Federal, state, and local governments have taken actions in response to the coronavirus that could affect rental housing affordability:
- As we saw in the Great Recession, when millions of homeowners lost their homes, they entered the rental market and drove up rent prices. The CARES Act allows some homeowners affected by the coronavirus to delay mortgage payments for up to a year. This step could help rent affordability if it prevents foreclosures on the millions of homeowners who may no longer be able to afford their mortgage payments. However, if the economic effects of COVID-19 last longer and foreclosure preventions expire,, the rental market could see higher demand, causing increases to rent.
- The CARES Act temporarily prohibits landlords with federally backed mortgages from evicting tenants for not paying rent. In addition, some state and local governments have implemented their own eviction moratoriums. However, renters are still on the hook for rent payments, which could become unaffordable due to reduced or lost wages.
- In some regions, state and local governments have allowed construction of new rental units to continue; while in others, work was stopped to slow the spread of coronavirus. In both cases, the construction industry faces economic uncertainties, which could further reduce production of new rental units. Fewer new rental units will lead to higher rents.
Prolonged distress in the housing market will likely have negative impacts on rent affordability. In our 2020 report, we found that there were more than 3 million additional households with rent burden in 2017 than there were in 2007, half of which paid more than 50% of their household income for rent.
Unaffordable rent was most common and most severe among lower-income households, with most of the poorest households paying more than half of their income in rent. The figure below shows the estimated percentage of renter households and rent burdens by income in 2017.
To learn more about rental housing market trends, check out our new report.
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