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The Need for Affordable Housing in the Market and in Your Portfolio

There’s an affordable housing problem in America, and it’s not going away anytime soon. The problem stems from both the demand and supply sides. Demand shows no signs of easing as home affordability continues to be out of reach for many Americans, and supply shows no signs of catching up to demand any time soon.

The numbers are staggering. (Source: National Low Income Housing Coalition)

  • The U.S. has a shortage of 7.3 million rental homes that are affordable and available to renters with extremely low incomes—that is, incomes at or below either the federal poverty guideline or 30% of their area median income, whichever is greater.
  • Only 33 affordable and available rental homes exist for every 100 extremely low-income renter households.
  • Extremely low-income renters face a shortage in every state and major metropolitan area. Among states, the supply of affordable and available rental homes ranges from 17 affordable and available homes for every 100 extremely low-income renter households in Nevada to 58 in South Dakota.
  • In 12 of the 50 largest metropolitan areas in the country, the absolute shortage of affordable and available homes for extremely low-income renters exceeds 100,000 units.

The need for affordable housing is pressing, but can we expect relief any time soon? Not likely.

High home prices, high mortgage rates, and a shortage of homes are all contributing to the crisis of home affordability, pushing more and more people into the rental market.

On the demand side, the assumption is that once wages rise and home prices fall, homes will become more affordable, which should ease the need for affordable rentals. That’s easier said than done. By one estimate, the best-case scenario for homes becoming more affordable is 3.5 years (Privatebank.jpmorgan.com). And don’t expect any help from the supply side. Supply is restricted because of severe underbuilding in the 2010 decade, relative to population growth. The supply problem isn’t going away any time soon since new supply continues to lag demand.

The demand for affordable rentals has been growing since the Great Recession. From a humanitarian standpoint, providing affordable housing rentals at fair rates would ease the tremendous amount of stress put on low-income families, where such a high percentage of their incomes go towards housing. The fact that 70% of all extremely low-income families are severely cost-burdened, paying more than half their income on rent, should give all of us pause.

The affordable housing crisis presents opportunities for those who can make a difference. Impact investing is gaining popularity as more and more investors realize that it’s possible to make a return on investment while making a difference. Investing in the affordable housing sector is a golden opportunity for investors to both make a return on investment and make an impact.

Those who read our articles and follow our podcasts have heard us tout the concept of following demand and investing in demand. Investing in demand, especially in a sector with unwavering demand, is not only ideal for generating above-market returns but also for shielding against both recession and inflation, where rental income can be sustained in an uncertain environment. This was proven during the pandemic.

Of all the commercial real estate sectors, multifamily was especially resilient during the pandemic, especially in affordable sectors. When COVID hit and the economy dipped, Class A properties immediately experienced significant demand and rent declines. Affordable housing trended the other way.

As occupancies dropped significantly in the Class A segment, Class B and C communities benefited. While occupancy rates, rent collection rates, and overall rental rates dipped among Class A properties, Class B and C properties were barely impacted (National Multifamily Housing Council (NMHC)).

The demand for affordable rentals isn’t going away anytime soon. And as the recent COVID and inflationary periods have demonstrated, it’s a pressing need in any economic environment.

The need for affordable housing is great. The need to add affordable housing to your portfolio makes sense.

To learn how you can add affordable housing to your portfolio to generate recession-resistant passive income, contact us today, and one of our experts will be in touch with you shortly.

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