The Rent's Too Damn High but It's a Problem With an Easy Solution... If Only
A study released this week by researchers at Harvard University found that rents are rising fast, and an increasing number of Americans are forking over half of their gross income or more on rent. It's a big squeeze on struggling households. There is, however, an elegant, simple solution to what is a growing problem. But it's a policy focused on helping individuals, rather than corporate America, and, as you might expect, it has so far languished in Congress under a barrage of lobbying.
According to the study (PDF), “the share of US households unable to find affordable rentals has been on the rise for a half-century,” but has seen “an especially large jump in the last decade.” More than a quarter of all renters – or about ten million Americans – paid more than 50 percent for their digs in 2009. Conventional wisdom among financial planners is that rent should make up about a 3rd of one's gross income.
In 1980, landlords asked an average of 30 percent of renters' incomes for apartments. Since 2002, that figure has averaged around 40 percent.
“It’s a real squeeze for the lower-income and moderate-income families, and we’re even starting to see it affecting middle-income families, too,” Erick Belsky, managing director of Harvard’s Joint Center for Housing Studies, told the Washington Post. “The prospects for improvement any time soon are dim.”
Stagnating incomes are part of the story. The study notes that wages usually rise with an expanding economy and then fall in recession, but “real renter incomes failed to rebound” after the 2001 recession “and now remain below their 1980 level.”
The rest is a matter of supply and demand. The supply of new rental units fell sharply with the economic crash – developers weren't building. Financing for all but high-end real estate projects was difficult to come by, so the supply of new low-cost dropped.
At the same time, a wave of foreclosures sent many erstwhile home-owners into the rental market. According to the study, the growing number of renters has reversed “trends prevailing from the mid-1990s to the mid-2000s.”
The housing bust and Great Recession have pushed up the share and number of renter households. With millions of homeowners delinquent on their mortgages, further increases in the renter population are likely. Owners that have gone through foreclosure are especially likely to remain renters for a number of years to come.
That brings us to a modest proposal that would go a long way toward addressing this problem. For the past several years, a number of economists have been calling for a “right to rent” measure that would keep homeowners whose properties are deep underwater in their units rather then sending them into the market for existing rentals.
Dean Baker, who has led the charge since 2008, called it a way to help homeowners “without throwing money at the banks.” Rather than Washington's ineffective mortgage modification programs, Baker says, “we can simply temporarily change the rules on foreclosure to give people facing foreclosure the right to rent their homes at the market rent.”
This is extremely simple and can go into effect the day after Congress passes the rule change. Judges or the court officers handling a foreclosure would be required to ask the homeowner whether they want to stay in their house as a renter. If they say yes, there would be an appraisal of the market rent of the home, and the homeowner would then have the option to stay in the house for a substantial period of time (e.g. 10 years), paying the market rent.
This would immediately give the homeowners facing foreclosure security in their housing. If they like the house, the neighborhood, the schools for their kids, they would have the right to stay there. It would also end the problem for neighborhoods of empty foreclosed houses. And, it would give banks real incentive to negotiate terms that allow people to stay in their homes as owners.
It's an idea that is getting more attention, as it should. It would cost tax-payers nothing, ease the glut of new renters and avoid the urban blight common to neighborhoods with a high number of unoccupied homes in foreclosure.
As Reuters' Felix Salmon points out, “banks which foreclosed on homeowners would then sell those homes to professional landlords, who would rent the houses out in perpetuity, either to the former homeowner or to renters who moved in after the homeowners moved out. That would raise the amount of rented housing in the US.”
In 2009 and 2010, Raúl M. Grijalva, D-Arizona, introduced a “right-to-rent” bill that went nowhere. But the foreclosure crisis has continued to deepen, and last week Grijalva reintroduced his measure. The bill. HR 1548, would allow homeowners facing foreclosure to petition for the right to rent their homes at current market value for a period of up to 5 years. In order to prevent abuses, the law would only apply to people who had originated their mortgages before 2007 and used the properties as their primary residences for a minimum of 5 years would be eligible.
"Passing this bill will help neighborhoods avoid the spiral of decay, crime and lower property values that often follows mass vacancies without creating any new bureaucracy or transferring a dime of taxpayer money to homeowners or banks," Grijalva told The Nation.
The banking lobby doesn't like the bill, and they helped kill it in the last two Congresses. They say that the law would lead to a wave of “strategic defaults,” as homeowners go into foreclosure to bring down their monthly payments. "Anything making the banks lose money means it's not making other loans in the community," Bob Davis, VP of the American Bankers Association, told the South Bend Tribune. (After shaming ordinary homeowners, another banking lobby, the Mortgage Bankers Association, didn't hesitate to strategically default on its Washington, DC, headquarters when it went under water.)
But as Dean Baker notes, it's a question of showering yet more tax dollars on the very banks that brought about this crippling recession, or helping individual homeowners stay afloat. "Let's just be really clear on this," he told The Nation. "If Congress and the Fed did not step in—Citigroup is out of business today. Goldman Sachs is out of business today. Morgan Stanley is out of business today. The banks got helped out. Now we're going to help people on the other side."
If you agree, you can contact your representatives and let them know you favor HR 1548, the Right to Rent Act of 2011.
