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Repost from Rogers Park Builders Group Summer 2018 Newsletter. – By Steve Cain.

 

changing gap supply demandProperty owners in Chicago can be forgiven if they feel like they are under siege. Local politicians of all stripes, from Aldermen to State Representatives to the Democratic candidate for Governor, seem to be tripping over each other to placate angry renters clamoring for more regulation of the rental market.

Just a short list of the worst of these recent proposals include Rent Control, “Good Cause” evictions, and ever increasing fees and set-aside requirements for affordable units under the city’s Affordable Requirements Ordinance (ARO).

Given these attacks on our livelihood and our character, it is easy to understand why property owners feel so frustrated and scapegoated by tenants and politicians alike. But what property owners often fail to acknowledge in this current political and economic climate is where this anger and resentment is coming from, and why it has become such a political hot potato in the current election cycle.

Why All This Anger and Why Now?

Let’s start with the obvious – many more Chicago residents rent than own. Ten years ago, we entered into the worst recession since the Great Depression, followed by a “recovery” that seemed to take forever to materialize with low growth in wages even as the unemployment rate steadily fell. Today, the country’s leading urban centers have mostly bounced back. But other parts of the country – and even many neighborhoods in otherwise prosperous cities – have yet to see the kind of recovery that typically occurs after a recession ends. Even today in many rural areas of the country, it is as if the recovery never came at all.

All of this has left many renters, in Chicago and across the country, angry and looking for someone to blame. Who better than property owners? After all, isn’t it always the “evil landlord” who keeps piling on the rent increases, even as average renters struggle to make ends meet? While Rogers Park is not (yet) the epicenter of these rent increases, neither has it been spared the impact of rising rents. Despite the condo conversion craze earlier this century, Rogers Park remains a largely renter-occupied neighborhood. The most recent census figures put the renter population in Rogers Park at about 70% of the total.

Property owners need to understand and acknowledge these economic fundamentals, and recognize that talk of an affordability crisis is a real phenomenon that is negatively impacting the lives of many tenants, some of whom reside in our own properties. Sure, the narrative of the defenseless tenant against the greedy and all-powerful property owner is simplistic and misses many of the complexities and nuances of the problem. But that does not mean the problem does not exist, and that renters do not have legitimate concerns.

So, what do we do with this knowledge? First, let’s understand exactly what the affordability crisis is – and is not.

What Is the Affordable Housing Crisis?

A stunning 74% of very low-income households (almost 3 out of 4) are severely rent-burdened, i.e., pay more than 50% of income for rent.

The best source of information on this topic for the Chicago area is the Institute for Housing Studies at DePaul University (IHS). Each year, IHS updates The State of Rental Housing in Cook County. The report always makes interesting reading.

The 2018 report analyzes census data from 2016 (the most recent available) to quantify the affordability crisis in the region. Here are some of the key findings:

DePaul Institute for Housing Studies, “2018 State of Rental Housing in Cook County”

  • The “rental affordability gap” is defined as “the mismatch between the number of households in Cook County that need affordable rental housing and the number of units that are affordable.” The “affordability gap” is the excess number of lower-income households in need of affordable rental housing (demand) over the number of affordably-priced units (supply). This assumes a maximum rent of about $910/month, the highest amount lower-income households could afford using no more than 30% of their income for rent. In 2016, this “affordability gap” fell to 181,794 units from 187,848 units a year earlier. The report notes that the 2015 figure was an all-time high. While this decline in the affordability gap is good news, the 2016 figure is still 15.6% higher than it was in 2007, before the recession started.
  • The affordability gap is acute among low and very low-income households. In 2016, about 84% of households earning between 30% and 50% of Area Median Income (AMI) were rent burdened by the IHS definition. Among very low-income households (those earning less than 30% of AMI), this number is 87.5%. A stunning 74% of very low-income households (almost 3 out of 4) are severely rent-burdened, i.e., pay more than 50% of income for rent.
  • The affordability gap continues to worsen in the city of Chicago, even as it is beginning to moderate in suburban Cook County. The moderation in suburban Cook County is due to a sharp reduction in demand, not an increase in supply. In the city, demand continues to be high, and supply continues to fall.
  • The worst affordability gap is in neighborhoods with high concentrations of low-income households. IHS specifically identifies three neighborhood clusters where this problem is most severe – the South Side neighborhoods of Hyde Park, South Shore, Woodlawn and Washington Park; the West Side neighborhoods of Humboldt Park, East/West Garfield Park and North/South Lawndale; and the North Side neighborhoods of Uptown and Rogers Park.
  • The IHS report sensibly suggests that the most effective solution to the affordability problem in Chicago and Cook County is to increase the number of housing vouchers (Section 8 rental assistance) to low and very-low income renters, and to design programs to help these households improve their skills and earn higher incomes.
changing gap supply demand

DePaul Institute for Housing Studies, “2018 State of Rental Housing in Cook County”

As the IHS report makes clear, the worst of the housing affordability crisis is not in the gentrifying neighborhoods of the near Northwest Side or Pilsen – it is predominantly on the South and West Sides. In these areas, rents are relatively low but incomes are even lower. A two-bedroom rent of $900 may sound like a bargain for anyone living in the city’s more affluent districts, but it is all but out of reach for households earning $15,000 or $20,000 per year. And there are a lot of these households in the city and suburbs.

How Much Has Rent Really Increased?

It is ironic that many of the people who are complaining the loudest about housing affordability in Chicago are not necessarily the same people suffering its worst effects. Much of the protests and Aldermanic anti-property owner legislating is coming from just a few near-downtown and North Side neighborhoods where gentrification is most prominent even while the greatest need is clearly on the South and West Sides of the city.

It is doubly ironic that Chicago actually ranks pretty well in terms of overall housing affordability, at least compared with the large cities of the Northeast or West Coast. In recent years, the two neighborhoods that seem to be most vocal in their call for rent restrictions and the preservation of affordable housing are Logan Square and Pilsen. Both areas have seen rapid gentrification and big increases in rent. Census figures suggest that many thousands of long-time residents in these communities – many of Hispanic descent – have been pushed out as a result.

Such rapid change is difficult for families who have lived in an area for many years. But it far from accepted wisdom that such families have the right to remain in a neighborhood at an affordable rent when the market is behaving otherwise. And there is much less agreement that government should somehow enforce this “right” at the expense of the individuals who own properties in those neighborhoods.

It is ironic that many of the people who are complaining the loudest about housing affordability in Chicago are not necessarily the same people suffering its worst effects.

Perhaps a good first step is to quantify the amount of these rent increases. This is surprisingly difficult to do by neighborhood area. I was unable to find a reliable source that tracks rent increases by neighborhood. I was, however, able to find information on average rent increases by submarket areas within the city of Chicago.

For the city overall, junglerent.com shows an average rent for the city of $1,407 in 2011 and $1,791 in 2018, an overall increase of 27.3%, and an annualized increase of 3.5%. Interestingly, rents peaked in 2016 at $1,956. Since that time, all the new downtown construction has started to bring rents back down as supply is beginning to exceed demand in these high-rent areas.

percent change since 2012

DePaul Institute for Housing Studies, “2018 State of Rental Housing in Cook County”

(It seems appropriate and fair to point out that this is exactly what well-functioning markets are supposed to do. If demand spikes, new supply should enter the market and relieve pressure on increasing rents by increasing the supply of available units. This is a reality that gets lost of the rent control advocates, and a reminder that property owners do not control the price of units – the markets do.)

REIS Inc. divides the city into several broad submarkets. I looked at Rogers Park/Uptown; Belmont-Montrose; Lincoln Park; and City West, a sprawling area generally west of the Expressways and north of I-55, extending to the city border in many directions. For these four broad market areas, the REIS data breaks out as follows:

  • In Rogers Park/Uptown, rents increased from $791 in 2010 to $1,010 in 2018 – 27.7% overall, 3.1% annualized.
  • In Belmont-Montrose, rents increased from $1,237 in 2010 to $1,427 in 2018 – 15.4% overall, 1.8% annualized.
  • In Lincoln Park, rents increased from $1,163 in 2010 to $1,367 in 2018 – 17.5% overall, 2,0% annualized.
  • And in City West, rents increased from $1,055 in 2010 to $1,264 in 2018 – 19.8% overall, 2.3% annualized.
No one likes it when rents increase, but how does a 1.8% annualized increase in Lakeview, or even 3.1% in Rogers Park/Uptown constitute a housing emergency, let alone one that requires rent control to tame?

There is little doubt that the Logan Square or Wicker Park areas within the City West market have seen much sharper rent increases over the 2010 to 2018 period. And none of these markets includes Pilsen, an area of particular interest since rents have risen so quickly in such a relatively short period of time. However, these statistics point to the fact that rents, while up over the past eight years, have not increased as much as the rent control advocates would have you believe. No one likes it when rents increase, but how does a 1.8% annualized increase in Lakeview, or even 3.1% in Rogers Park/Uptown constitute a housing emergency, let alone one that requires rent control to tame?

Where Do We Go From Here?

A lot of the impetus for rent control and other rental housing regulation comes from activists in a few, hot neighborhoods. The protests and demonstrations that seem to occur daily on the near Northwest Side and in Pilsen get most of the attention, certainly by our elected officials looking to win the votes of these activists. But the true affordability crisis is not primarily in these neighborhoods. Rather, it is in the city’s poorest neighborhoods where housing is relatively inexpensive, but still too expensive for the incomes of area residents.

What the displaced families who have had to leave Logan Square and Pilsen have in common with the rent-burdened families who currently live on the South and West Sides is that there are too few affordably-priced units in the city relative to the number of households earning low and very-low incomes. Not many people would argue that this is not a real problem, or that it doesn’t need a real solution. But there is huge disagreement about how best to improve affordability and how to help the people most in need of assistance.

apt bldg front

On the one side are the tenant activists who insist that housing is a right, and that any family currently living anywhere in the city should have the right to stay in that neighborhood at an affordable rent. These activists blame greedy property owners for rent increases in gentrifying neighborhoods and propose rent control and other government oversight measures to slow or stop market forces.

On the other side are what I will call the pragmatists. This group recognizes that we live in a market economy and looks to market-based solutions to solve the inequities that the market inevitably creates. These solutions can include an increase in the number of housing vouchers for households in need, more tax-credits to increase the supply of new affordable housing, and even some reasonable governmental mandates regarding the inclusion of affordable housing units in new apartment developments, or fees in lieu to create affordable housing elsewhere in the region.

Any government intervention that results in the production of less housing – as rent control would certainly do – will ultimately drive housing costs higher as supply falls and demand continues to increase.

The two sides are far apart in what they believe is the cause of the problem, and what they believe will solve it. RPBG is firmly on the side of the pragmatists. We recognize the inequities that arise in a market system, but still believe the market provides more and better housing for a wider group of people than a government-regulated system ever could. Any government intervention that results in the production of less housing – as rent control would certainly do – will ultimately drive housing costs higher as supply falls and demand continues to increase. This is simple economics – wouldn’t it be nice if it was simple politics too?

 

 

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