Comparing Market-Rate and Affordable Rents Reveals Stark Regional Differences

There’s no question that affordability is a key challenge for the housing sector, as it is for the millions of Americans searching for a place to live that is within their budget. However, determining what “affordability” means in the context of a particular city or region and what factors influence it presents a challenge of its own.

At a time when the issue is becoming ever more urgent, a new first-of-its-kind study by Yardi Matrix attempts to take on this challenge. It was guided by the hope that its findings and the transparency of its database would provide insight into the workings of the market and help it operate more efficiently to create affordable housing.

The study defines fully affordable housing as properties in which at least 90% of the units have income restrictions. It determined the fully affordable maximum allowable rent using a per-unit calculation based on HUD income limits, family size adjustments, utility allowances, and “the specific property income restriction splits (how many units’ rents are restricted to 40%, 60% or 80% of area median income).”

It then compared the average maximum allowable rent of privately owned fully affordable units with the average advertised rent of market-rate units. The analysis took into account four property quality types: discretionary (A+, A apartments), upper mid-range (A-, B+), low mid-range (B, B-), and workforce (C+, C). For each metro, it calculated the average advertised rent in each of these categories.

The federal government defines affordability as housing that costs no more than 30% of a household’s gross income, including utilities. The Yardi analysis calculated the percentage of area median income (AMI) it would take to afford the rent in each quality category before becoming cost-burdened, meaning rent consumed more than 30% of income.

“The results nationally make apparent that the level of competitiveness between market-rate and fully affordable properties varies greatly by locale,” the report stated.

It found at least 90% of market-rate stock is competitive with affordable properties in seven small markets, including South Dakota, Wichita, Huntsville, Amarillo, Des Moines, Fayetteville, AR, and Omaha. However, in 32 metros – mostly large ones but including a few tertiary metros – no market-rate properties were deemed competitive. This group included San Francisco, Los Angeles, Boston, Miami and Northern New Jersey as well as smaller cities like Hickory, NC and Port St. Lucie, FL.

Factors including affordability and competitiveness included cost, supply growth and the composition of housing stock, the study found. In metros with extremely high average rents, there is a big difference between market rates and fully affordable rents, while the difference is much smaller where average market-rate rents are low.

Market-rate rents may also be more competitive where there has been a sharp increase in housing supply. “The reasons for the impact of supply growth are complicated. The primary factor seems to be that markets that have less burdensome entitlement and regulatory processes are more responsive to market demand. Another factor is that markets that allow more affordable construction have a smaller gap between market-rate and affordable rents,” the report stated.

Property quality as a percentage of total stock is also a factor. Market rates and affordable rents are more likely to be close if most of the housing stock is older. Newer cities tend to have a higher percentage of high-quality stock.

The report noted that it is not intended to be the last word on the topic of affordable housing but part of an ongoing effort. “The affordable housing sector has long lacked transparency on the level of market-rate apartments. Information and data are vital to creating efficient and functioning markets,” the report commented.