What is the single biggest monthly budget item for most families? A payment for housing, often a rent check.
Rents are starting to rise dramatically and in every major metropolitan area are expected to rise from 3 percent to 10 percent in 2011 and beyond. That means a family paying $1,700 a month for an average two-bedroom apartment in San Jose might see a rent hike to nearly $2,000 for the year.
For many families, the extension of middle-class tax cuts will go out the door to their landlord. Economic recovery could be stopped in its tracks by sudden rent shock unless Congress and the administration adopt a balanced approach to rental housing finance.
While rising rents are good for apartment owners, it leaves many of the one-third of Americans who rent with less money in their pockets, just as the economy needs them to spend a little more.
Rising rents reflect increasing demand and constrained supply. Nearly 80 million aging boomers are entering their prime renting years, along with 4.5 million people who lost their houses to foreclosure. Yet multifamily construction starts plunged from nearly 350,000 units annually before the 2008 financial collapse to barely 100,000 annually.
Rising rents over time spur increased production. But over the next 30 years, we may need to add more than 40 million new housing units of all types to meet the demand. We cannot get on track without a strong rental housing finance system.
Clouding this issue is a loud, ideologically tinged call to get government out of housing, especially in the single-family mortgage market. Despite the flawed underpinnings of this extreme free market view, apartment finance could be held hostage as the debate rages.
Yet apartment finance with government help was not responsible for the financial crises beginning in 2007. Apartment loans held or guaranteed by Fannie Mae and Freddie Mac have default rates of under 1 percent, while private securitized loan defaults are over 10 percent.
Private developers may want to create rental housing to meet the exploding demand. But without sufficient long-term financing options, few can take the risk of starting construction.
To avoid shrinkage in the apartment market just when we need expansion, a multifamily housing task force convened by the Center for American Progress proposed reforms to establish a responsible role for government.
It calls for a limited program to provide government insurance to guarantee timely payment to investors. It involves securitization of housing loans to expand the financing market by spreading risk, increasing access to private capital and enabling longer-term, fixed-rate mortgage options.
Like the FDIC, which insures bank deposits but not the bonds or stock of a bank, the government would not guarantee the debt or equity. Instead, this guarantee would be just of payment on the mortgage securities, and it would be financed by an assessment on the securities insured.
It is tempting to believe that the private market can do it all without any government role. But a long history in American finance has shown that not to be true. Carefully tailored and limited government aid is a key part of what we need to avert the rental housing shortage on the horizon.
David M. Abromowitz is a Senior Fellow at the Center for America Progress, www.americanprogress.org. This commentary first appeared in the San Jose Mercury News.