The shortfall of affordable rental units has widened considerably during the past six years, according to a new report released by Freddie Mac Multifamily.

Steve Guggenmos
Steve Guggenmos

The research finds that a combination of increasing rents and stagnant household incomes is causing the growing problem, which could become even worse if actions are not taken to increase the supply of affordable units commensurate with the increasing demand from lower-income renters. Previous Freddie Mac research has found that growing demand and rising costs of land and construction have led to a widening supply gap—with the country experiencing an annual shortfall of approximately 400,000 housing units, even when taking single-family starts into account.

The latest report takes a new approach to analyzing affordability, looking at loans that Freddie Mac Multifamily financed multiple times between 2010 and 2016. The mortgage giant examined loans covering more than 97,000 units.

The results found that at the first financing, 11.2% of the total number of underlying rental units across the United States were categorized as affordable to very low-income (VLI) households with incomes no greater than 50% of the area median income (AMI). At the second financing, rents had increased so significantly that just 4.3% of the same units were categorized as affordable to VLI households. This amounts to more than a 60% reduction in the number of units deemed affordable to VLI households.

“Our analysis looked at the affordability of the same rental units at two close but different points in time. In a matter of just a few years, we found that a large number of units previously affordable to very low-income families could no longer be considered affordable,” says Steve Guggenmos, vice president of Freddie Mac Multifamily Research and Modeling. “This is a trend that is worsening, and Freddie Mac is working to better understand and develop offerings that meet the needs of this market. This report, and innovative offerings like our Targeted Affordable Housing and Small Balance Loan programs, are part of that effort.”

The analysis also looked at nine states where Freddie Mac Multifamily financed the most rental units twice during this six-year period. While the overall change in affordable VLI units varies greatly by state, the report finds that in seven of the states, a significantly smaller percentage of rental units qualified as VLI during the second financing. These include Arizona, Colorado, Georgia, Nevada, North Carolina, Texas, and Washington. In Colorado, for example, the number fell from 32.4% to just 7.5% of units. In North Carolina, it plunged from 9.8% to just 0.3%, according to Freddie Mac.

While Florida and California saw increases in the number of units considered VLI, it was minimal (0.1% and 0.2%, respectively), and the percentage of units in the two states stayed below 3% during both financings. In California, the number of rental units affordable to even median-income renters, earning between 80% and 100% of AMI, fell from 73.4% in the first financing to 39.4% by the second financing.

Freddie Mac also looked at broader market data to ensure these results were consistent with overall market trends.

The report concludes, “Significant research on market trends suggests worsening affordability in the rental market. Our property-specific analysis further illustrates the issue. The affordability gap will continue to widen if no action is taken. Even as Freddie Mac Multifamily funds units that are affordable to lower-income renters, those units will not stay affordable for long if rents grow at market-level rates. To make a real, lasting difference, those of us participating in the multifamily rental housing market must make sure that we understand market needs. 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.”

Click here to view the report.