The Downstream Impacts of the Rental Crisis
Two weeks ago, our insights post examined why available rental payment data is not able to fully capture the severity of the current crisis, much less the one that looms on the not-so-distant horizon as economic conditions continue to worsen. From partial payments, payment via credit card, extreme demand for state and local rent payment programs, to lack of data about how smaller landlords and property investors are faring, there are many indications that millions of Americans are falling behind, or will soon fall behind, on their rental payments. Expiring eviction moratoria and federal stimulus and financial support means that we are facing a rent nonpayment and eviction cliff.
On Wednesday, I was invited by the House Financial Services Committee to testify about the other side of the rent equation – the downstream impacts of a widespread drop in on-time and in-full rent payments. The hearing’s title - The Rent Is Still Due: America's Renters, COVID-19 and an Unprecedented Eviction Crisis – captures what is at stake well. Whether it is the smaller landlords who do not have the financial reserves or liquidity to weather the current storm, the local governments who can ill afford to lose additional tax revenue, the tens of millions of workers in the rental housing industry, or the banking and financial sector that ultimately supports and funds future affordable and market rate housing development, it is clear that we must do everything we can to stabilize the rental market.
As Forbes real estate contributor Dima Williams said in her coverage of the hearing:
“The $100-billion rental assistance contained in the HEROES Act, which the U.S. House of Representatives recently adopted, is crucial for both renters and landlords, who will continue to grapple with the coronavirus-triggered financial downfalls even if the economy begins to recover.
“This was the overarching message that emerged during the two-hour long virtual hearing held by the U.S. House Subcommittee on Housing, Community Development, and Insurance today.”
Below is a lightly edited excerpt from my written testimony. You can watch the full hearing, which was hosted by the Committee’s Subcommittee on Housing, Community Development, and Insurance by clicking here. My written testimony is available at this link.
In a recent research note, Brookings observed that “the COVID-19 crisis seems poised to accelerate or intensify many economic and metropolitan trends that were already underway, with huge implications of their own.” The COVID-19 pandemic and associated economic shocks has further worsened our national housing crisis. Research by the Terner Center for Housing Innovation at U.C. Berkeley suggests that approximately 50 million people are living in renter households have where at least one income earner works in an industry most likely to be immediately affected by COVID-19 related closures and layoffs. And 7.1 million of those households were already rent-burdened. The impacts are likely to be worse for renters living in high-cost states or metropolitan areas.
The health of the housing ecosystem, and the health of our entire economy, begins with consistent rent payments. Property owners rely on steady rent payments to meet debt obligations, pay property taxes, meet payroll, and maintain and operate buildings. Lenders depend on mortgage payments to meet obligations to investors and maintain a steady flow of liquidity into the system. Local governments rely on rental payments to support property tax revenues and utility payments to balance the books and provide reliable public services.
Rent payments are the cornerstone of the housing ecosystem and any major loss in rental income will create disastrous economic effects. Based on unpublished research by ECONorthwest, residential rent payments alone total nearly $50 billion each month. Rent payments are not an isolated transfer directly from renters to landlords, but instead underpin an entire marketplace of landlords, property management staff, maintenance crews, and local contractors.
Landlords and Property Owners
Of the nearly 20 million rental properties in the United States, 14.3 million are owned by individual property investors. These individual landlords account for nearly 20 million of the 48 million rental units across the country. These units are more likely to be single family homes, duplexes, or other missing middle housing, which fills a critical housing need in this country. These property owners do not have cash reserves to cover large scale rental income loss for a sustained period, especially given the added costs of maintenance during the COVID-19 crisis. Research from the Urban Institute finds that owners of small unit properties – those with fewer than 20 units – tend to have lower incomes and are more likely to rent to tenants with lower incomes who are more likely to be in COVID-19-impacted industries. An analysis by Harvard’s Joint Center for Housing Studies estimates that 20 percent of these renters will have difficulty paying rent. In contrast, 12 percent of renters in larger buildings are likely to face similar challenges. These renters are also much more likely to live in homes that are not subject to federal eviction moratoria.
As with many other industries, landlords and property owners – particularly affordable housing owners - operate under very tight margins. These margins are already strained by new COVID19 related maintenance and safety costs, and without targeted relief, many will simply not survive the crisis.
As President and CEO of the affordable housing lender Community Preservation Corporation Rafael E. Cestero observed:
“Our most vulnerable Americans are now facing historic levels unemployment and are being forced to choose between paying rent and affording life’s necessities. The Emergency Rental Assistance Act will get critical rental assistance into the hands of these families, keeping people off the streets and allowing them the peace of mind that comes from knowing their living situation will remain stable. This rental income will also ensure that owners of affordable housing and small rental buildings, which already operate on thin margins, will be able to keep their properties safe and up to code.”
As discussed earlier, U.S. rental payments account for approximately $50 billion each month. Rent and utility payments make up majority share of the housing sector’s 15 percent to 18 percent contribution to GDP. According to the National Multifamily Housing Council and the National Apartment Association, the rental housing industry supports over 17 million jobs. As the two organizations put it, “We are working alongside public officials to put residents and employees at ease. Yet as more residents face job loss or furloughs and are unable to fulfill rent obligations, many owners/operators fear they, too, will not be able to satisfy financial obligations required to operate their properties.” Without on-time and in-full rent payments, millions of workers directly and indirectly dependent on rental housing are put at significant risk.
Banking Sector and Credit Markets
A rent non-payment crisis poses significant risk to America’s financial system. Debt service and repayment of loans on rental housing depends on individual renters making payments to property owners. Banks rely on current payments to ensure solvency to their depositors; loans in Fannie Mae, Freddie Mac, and private label Mortgage Backed Securities must be kept current to deliver repayment to investors – including pension funds – that provide liquidity. Large-scale non-payment of rent would increase probabilities of default and loss severities across the banking sector and credit markets, increasing systemic risk across America’s financial system.
Like the actions taken in 2008 to stem systemic financial meltdown, emergency rental assistance is the type of swift intervention that must be taken to preserve this ecosystem. Lack of action now and a potential financial market collapse would cost the American taxpayer more than emergency rental assistance today. The current crisis could have a huge impact on future housing production. After first quarter lending data became available, the Mortgage Bankers Association observed, “property investors and lenders have now turned more of their attention to their existing portfolios instead of new business opportunities.”
Jim Morell, President and CEO of the Shelton, Washington-based Peninsula Community Federal Credit Union, told us:
“As a financial cooperative, we are concerned about the impact a large volume of mortgage forbearances will have on the liquidity of mortgage services. Peninsula Credit Union relies on non-bank servicing companies like credit union services organizations (CUSOs) to support member needs to affordably borrow for the purchase of homes and loans directly to borrowers for bare land and construction loans. The longer the CUSO or credit union is without payments due to borrower deferment, liquidity issues will arise, and the result will be a significant reduction of affordable mortgage lending and housing construction.”
Local governments on the front lines of this crisis are requesting federal emergency rental assistance. Carl Schroeder, Government Relations Advocate with the Association of Washington Cities, an association that represents Washington State’s cities and towns, said:
“We are very concerned that without significant action many housing vulnerable people in our communities risk falling into homelessness. Our state’s homelessness response system was not adequate before the pandemic and is not prepared for that influx. We are particularly concerned about what will happen after the expiration of the Governor’s eviction moratorium. We fear that tenants still will not be in a position to pay rent without assistance.”
Cities and counties rely on property taxes to maintain budgets and pay for critical infrastructure, including schools, police and fire departments, road maintenance, and public works. On average, property taxes make up 47 percent of local budgets and are the largest single source of revenue. While property taxes are a less significant portion of state budgets, the downstream effects of COVID-19 related state budgetary shortfalls will dramatically reduce funds to local governments, making property tax revenue even more important for keeping local governments afloat. The Center for Budget and Policy Priorities estimates that state budgets will experience a more than 25 percent shortfall in fiscal year 2021 and that revenue could fall to levels not seen since the worst years of the Great Recession.
This major loss in revenue is compounded by increased costs associated with health and safety measures taken to mitigate the impact of the pandemic. Furthermore, critical public works infrastructure relies on consistent utility payments. These payments are directly tied to rental units, and cities and counties cannot maintain these public works without consistent payments. The loss of tax revenue from rental housing would be a major blow to local governments, and emergency rental assistance is critical in ensuring these tax payments continue. The National Energy Assistance Directors Association estimates that the number of Americans eligible for the Low-Income Home Energy Assistance Program (LIHEAP) has grown from 28 percent to 36 percent because of the pandemic. There is concern that the funds allocated by the CARES Act for additional LIHEAP assistance will not be enough to cover Americans’ growing need for help paying their utilities.
COVID-19 will continue to have unprecedented devastating impacts on public health, jobs, and the economy. The immediate effects of the crisis have sent millions of households into dire situations – leaving millions of families and individuals to make difficult financial decisions. Ensuring that people have access to affordable, quality housing should be a public policy priority, as shocks to the rental market will spill over into every sector of the economy and stifle recovery. To prevent the crisis from getting worse – and to solve it once and for all – action is needed in the immediate, intermediate, and long-term horizons. Fortunately, the House has already passed meaningful and comprehensive rental assistance in the HEROES Act through its inclusion of the Emergency Rental Assistance and Rental Market Stabilization Act. It is now up to the Senate to act on these provisions to ensure Americans can stay in their homes and rent will continued to be paid in full and on time.