Could our super-sized rental market be crowding out affordable housing opportunities?

By Molly M. Scott :: June 17th, 2014

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We Americans love our space. For pretty much everything, it’s “the bigger, the better,” and our homes are no exception.

At the same time, it’s pretty clear that we don’t have enough affordable homes to go around. I often hear about the need to build more affordable rental units, particularly for larger families. But what if our national preference for building bigger homes were actually crowding out affordable housing opportunities?

Back in my economics 101 class, I remember the professor talking about the law of basic supply and demand. When supply exceeds demand, prices go down; when demand outpaces supply, prices go up.

So if we want stable and affordable rental housing prices, we’d want the supply of rental housing to match what people needed and wanted. Unit size is certainly not the only factor that drives demand for housing, but analysis of the rental market by this factor with 2011 American Housing Survey data does yield some interesting insights.

oversizedRentalMarket

The most ubiquitous unit size in the American rental market is the two-bedroom; 40 percent of all rentals fall into that category. Roughly 30 percent are larger; 30 percent are smaller. Studio apartments are the least common, accounting for only about 2 percent of all rentals.

How does that compare to rental housing demand? Unfortunately, we can’t guess people’s preferences, but we can estimate what American renters might need. The standard rule of thumb in much of the rental market is that households should have at least one bedroom for every two persons—anything less than that is considered crowding. Renters certainly can rent bigger spaces if they prefer, but policymakers generally consider that the two-people-per-bedroom standard provides for reasonable and decent living conditions.

Applying this standard, nearly two-thirds of American households (63 percent) need only a studio or one-bedroom rental unit. Roughly another quarter (27 percent) would fit comfortably in a two-bedroom, and only about 10 percent really need to live in units with three or more bedrooms.

So how do renters actually live? Analysis shows that their living arrangements look pretty much identical to the supply of rental housing.

In all reality, there are far more people who could live in studios or one-bedrooms than rentals of this size. That means singles and married couples must compete with families and larger households for larger units, driving up their cost. Small households’ “over-housing” may also indirectly lead to “under-housing” for larger low-income households who have to seek smaller and smaller accommodations to keep the rent within reach.

We’d expect some of this would happen anyway, with high-income small households able to exercise their preferences to rent larger units. But the problem may be much bigger than preferences— it may be structural.

One solution might be very well to build more bigger units to lessen the competition at that end of the rental market, since almost everyone has a preference for more space, holding all things equal. But while counterintuitive, building more smaller units may actually be just as important a strategy for policymakers to consider.

Local communities should look closely at how their rental housing markets align with household size and income to decide what combination of strategies works best to ensure affordable housing options for the greatest number of people.

7Comments

  1. Kevin  ::  2:21 pm on June 17th, 2014:

    Part of the problem with providing studio apartments are the building code minimum requirements as well as the cost to sprinkler higher-density buildings. There is also added costs in doing more transactions for a smaller amount of pay. As a landlord, I definitely see the need, but know the costs to providing it can be enormous.

  2. Barbara Samuels  ::  1:33 pm on June 18th, 2014:

    This may not be a problem in all markets — in fact the problem may be just the opposite. In the Baltimore region, for example, the market does not produce enough 3 -BR units, and a paltry 6% of the multifamily pipeline is comprised of 3-BR units. The performance of the LIHTC program is not any better. Even most “family” developments have few 3-BRs, and developers get full points under the QAP for producing as few as 10% 3-BR. Moreover, many one and two person households rent 2 or 3 bedroom units, not because smaller units are unavailable, but because few people prefer the studios and one-BRs. Again, in our region, even the LIHTC age restricted elderly developments increasingly include 20% (or more) 2-BR units.

  3. Chris  ::  4:47 pm on June 18th, 2014:

    I have never know market forces to cause affordable units to be built. Econ 101 does not apply.

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  6. John B.  ::  12:33 pm on June 29th, 2014:

    I think you nailed the problem with the American perception about the size. Many people are still concerned about the size, and do not pay attention to other problems that can be connected with the rental or buying a home. I’m concerned about one thing – how can we still believe in our economy teachers when we can clearly see the housing prices are not driven by a pure demand-offer relations. It is far more complex to understand the housing market, sometimes rather resembling a game of poker than a serious business. People buy because they think it is the best way how to insure themselves, but then end up in foreclosure or with retirement mortgage with their houses price seriously deflated.

  7. Sonia  ::  9:21 am on July 21st, 2014:

    Here in Washington DC the market seems to be supplying many studio and one bedroom units and now some compact or near micro units at market rates. The market failure seems, if anything, to be for large units in multifamily complexes. The graph may illustrate a problem of aggregation. There is not one market buy many rental markets, separated by location (economic health of the community), age, income, amenity preference and race.