As home prices skyrocketed during the pandemic, and subsequent interest rate increases made mortgages more expensive, homeownership has become unaffordable for a large portion of the population. However, U.S. renters have also experienced a seismic shift in affordability that has been largely ignored by policymakers. Middle-class Americans were once able to rent a modestly priced, aging apartment in a solid neighborhood with good schools without the need for subsidies. However, a dominant trend of real estate “fix and flips” orchestrated on these older apartments has pushed rents higher and created a serious affordability gap for this segment of the population.
This cohort — the “Forgotten Middle” — has incomes too high for Section 8 vouchers and too low for current market rents. Since January 2020, national apartment rents have increased approximately 25%, from a median asking rent of $1,584 to $1,981. As a result, over half of U.S. renter households (21.6 million) are considered cost-burdened, spending more than 30% of their gross income on rent — 11.6 million of those renters spend more than 50%.
The state of Florida is at the epicenter of this shift. The metropolitan area where the highest percentage of the population is cost-burdened is Miami-Fort Lauderdale, where a staggering 65% of renters fall into this category. Second place nationwide is the Orlando-Kissimmee-Sanford metropolitan area at 61% of renters. This is up from 56% in 2019 and reflects the degree to which rents are growing faster than incomes. Orlando median rents have increased 24% during this time, while median renter household incomes increased only 16%.
Entry-level housing has tightened as developers increasingly opt to build larger, more expensive dwellings. The share of entry-level homes built (smaller than 1,400 square feet) has declined from 40% in the 1980s to just 7% in 2022. The percentage of Class B and C apartments has dwindled from 66% of units constructed in 2000 to 49% in the first quarter of 2023. Furthermore, during the past decades, landlords have pursued value-add strategies that invest in unit upgrades to increase rents. This means the existing stock of Class B and Class C units, which are generally older or in less desirable areas, has been upgraded to Class A, commanding rent increases of 30-50%. These dynamics have left 51.9% of U.S. renters cost-burdened.
Policymakers must stimulate the construction of smaller, more affordable housing units that fall outside of current programs. An estimated 75% of the residential land in many U.S. cities is zoned for detached, single-family homes, preventing the development of multifamily or townhomes. Reforming zoning laws to enable greater density would pave the way for more diversified housing products. Additionally, streamlining the two- or three-year approval process for financial programs like the Department of Housing and Development’s 221(d)(4) construction lending facility, would immediately encourage new development.
Additionally, local governments could provide incentives for projects that peg rents to Area Median Income post-renovation, reducing the need to drastically increase rents. One such policy aimed at increasing affordable housing is Florida’s Live Local Act. The state legislation passed in 2023, though it faces local government pushback in some areas and will take time to implement.
The U.S. government continues to incentivize homeownership but does relatively little to support renters. According to a 2018 analysis, the federal government provided more than $400 billion in tax subsidies for homeownership compared to just $72 billion for rental housing from 2017-2021. That 6:1 ratio provides little help to renters.
Nearly 15 million households are squeezed on rent and may never become eligible for homeownership. The longer households that rent are confined to renting beyond their financial means, the less opportunity there is to access the compounding benefits of homeownership and participate fully in the economy.
Russ Krivor is CEO of Sovereign Properties, a multifamily real estate developer that focuses on middle income and millennial demographics. He lives in Miami.