|An older, urban townhouse in a healthy metro area: could be rented or owned.|
Every region needs a certain proportion of rented homes and owned homes, and this optimal balance is constantly shifting with fluctuations in housing market demand. Right now, most areas of the U.S. find themselves correcting for years of oversupplying owner-occupied homes. A combination of demographic and financial conditions have made renting a more attractive option - or at least the only option - for many households. According to the most recent census numbers, multifamily housing starts increased by 70% between March 2012 and the year before, while single-family housing starts increased by only 18% (after falling from years before). Like warming up a bathtub by adding hot water, new construction is one way to achieve the balance. But it's very slow and sometimes the bathtub is already full enough.
Another way to adapt is to convert the tenure of existing homes. This is the premise of the Federal Housing Finance Agency program that would sell some of the inventory of government-owned foreclosures to bidders who agree to manage them as rentals for a period of time. It's somewhat of an experiment that may or may not work as intended, but the idea is to unload the holdings, provide affordable rental opportunities, and avoid squashing what might be a recovery in home prices.
But what if homes can be built to be naturally adaptable from the outset? During the lifespan of a home, neighborhood-scaled and regionally-scaled demands will inevitable change. A long-term outlook will envision how the same structure can adapt to these conditions as needed.
It turns out that certain kinds of homes lend themselves to conversion better than others. The Housing and Urban Development agency's PD&R office just released a study of these adapting homes. Using the American Housing Survey, which has followed the same set of housing units over several decades, researchers picked out the homes that have switched between rental and ownership at least once between 1985 and 2009. There are 23.8 million of them, or 18% of the nation's housing stock. Looking at some of the other housing attributes in the survey, they were able to create a profile of the kinds of homes more likely to switch.
In order of strength of correlation:
- Adaptable homes tend to be townhouses or duplexes. About three quarters of all single family detached homes are only ever owner-occupied, and the reverse is true of multifamily housing. But single-family attached homes are remarkably flexible, with 35.6% of all units adapting during this time period. Small multifamily buildings of 2-4 units also scored highly.
- Adaptable homes tend to be small but not that small. Two bedroom and three bedroom homes are the most likely to switch tenure. Larger homes are mostly only owned, and smaller ones tend to just be rented.
- Adaptable homes tend to be in central cities. In metropolitan areas, the further the home is from the center the less likely it is to have switched. Typically, outer suburban housing is only owner-occupied.
- Adaptable homes tend to be older.The older a home is, the more likely it is to have switched. This holds true when the analysis is confined to only homes built before 1985, when the dataset begins. The authors speculate that this could be reflecting older homes that were built to accommodate an owner and a renter on a different floor. These housing types are particularly flexible, although new homes are rarely equipped with accessory units.
- Adaptable homes tend to be in growing and economically healthy metropolitan areas. In metropolitan areas that grew by 5% or less over the last three decades, 22.4% had switched. That rate increases to around 30% in high-growth areas. Economically healthy cities have a greater need to absorb changes, and also tend to have a higher proportion of renters in general.
When you picture a switch happening, you might think of the conventional "trickle-down" process. An older home that has depreciated in value over the years eventually is converted to a rental unit, or maybe several, for households with less income. However, this storyline is not supported by the data. In fact, a conversion from rental to ownership is almost just as common as from ownership to rent. It should also be noted that we're not talking about housing as revolving doors of tenure. The ones that switched typically remained that way for many consecutive years.
The study did not consider a couple of major factors in adaptability - deed-restrictions and zoning ordinances. Homeowners' Associations or local governments forbid or heavily regulate rental in many residential areas, either, depending on your perspective, to promote neighborhood stability or to keep lower-income households at a distance. Since these occupancy restrictions are more common in the suburbs and among newer housing subdivisions, the correlation between these variables might be explained by such legal barriers. Either way, it's pretty clear these regulations considerably impede adaptability.
U.S. Presidents and Congress have quite openly proclaimed homeownership as the superior form of tenure for many decades, and housing policy continues to nudge families in this direction. However, in the wake of the housing market downturn, others are seeking to raise the profile of renting as a viable option in its own right. Injecting more adaptability into the housing stock will allow the succession of occupants to adjust to their own changing needs over the decades or even centuries of the home's use.
Other Posts by Daniel Nairn
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