Julián Castro got a close-up look at the affordability crisis when he relocated his family to Washington, D.C., earlier this year.

The newly appointed Department of Housing and Urban Development (HUD) secretary balked at the price of his two-bedroom apartment in the Woodley Park area of the District after moving from San Antonio.

“I’ve had a front-and-center seat to the challenges of rental affordability out there,” he jokes.

Julian Castro, secretary of the Department of Housing and Urban Development (HUD).
Julian Castro, secretary of the Department of Housing and Urban Development (HUD).

The average effective rent of an apartment in San Antonio, where Castro served as mayor, is about $906, compared with $1,614 in the Washington, D.C., metro, according to Dallas-based research firm Axiometrics. Castro, who owns a four-bedroom home in San Antonio, would have similar sticker shock were he looking to buy: The median price of an existing San Antonio home was $166,700 this year, against a median price tag of $346,500 in the nation’s capital, according to -Metrostudy, the research arm of MFE parent company Hanley Wood.

Castro purchased his San Antonio home in 2000 after graduating from law school. And he hopes to make the dream of homeownership come true for many other hardworking Americans.

“Right now, across this country, there are responsible families thinking and talking about owning a home,” he says. “But they shouldn’t have to wait for a miracle to secure this dream.” 

Yet, as the nation’s homeownership rate continues to decline—from a high of 69.2 percent in 2004 to today’s 64.4 percent—Castro finds himself in something of a bind. How can he spur homeownership at a time of tight mortgage restrictions while also promoting a more affordable rental market that, as he recently discovered, is anything but affordable? He’s smack-dab in the middle of the rent versus own tug-of-war, a referee in a mutually exclusive battle that the multi-family side has been winning for years. 

Whether the rental industry continues to win hangs in the balance of Castro’s priorities.

“The rental market is just as important as the single-family ownership market because, for many folks, the rental market is their starting point,” Castro diplomatically says. “Even for families that are well established, they are renters, and we want to ensure that there’s affordability there. I see HUD’s role as helping to spark greater opportunity in people’s lives, whether they’re a renter or an owner.”

The Subprime Death Spiral
Castro will seek to strike an equilibrium in federal housing policy, after years of a steady, some would say myopic, focus on homeownership from the Clinton and George W. Bush administrations.

That heavy-handed push for single-family housing was damaging in more ways than one, says Stan Humphries, chief economist at Seattle-based Zillow. Beyond promoting an unsustainable homeownership rate—and thousands of unsustainable mortgages—the lack of federal attention paid to the rental industry has trapped many would-be homeowners in costly rentals.

“The fact that we’ve ignored affordable rental housing for so long is coming to repercussion now for homeownership,” Humphries says. “Today’s renters are tomorrow’s buyers. The fact that rents are unaffordable makes it very hard for them to save up and get a down payment.”

Daniel Bachman, senior U.S. economist at New York–based -Deloitte, says it’s overly difficult for potential home buyers to get a mortgage in a market where lenders are still feeling burned from the last downturn. Tweaks to underwriting standards aren’t enough: Regulators and policymakers need to figure out how best to securitize mortgages, he says.

“There’s some attempt by the regulators to reduce the down payment a bit, but a lot of them are working around the edges, in particular, without a long-term answer to the question of how we repackage mortgages so they’re acceptable securities and competitive in financial markets,” he says.

The credit standards coming from today’s shell-shocked lenders have forced many single-family home builders to concentrate on the higher end of the market, forgoing the production of more entry-level homes.

“Builders are building homes for those who can get mortgages,” Humphries says.

First-time home buyers make up about 33 percent of today’s new-home purchase market, down from the traditional 40 percent, according to the National Association of Realtors. Castro, of course, aims to reverse that trend. During an address at the Bipartisan Policy Center’s annual housing summit in September, he noted how the average FICO score for a Fannie Mae or Freddie Mac home loan is hovering around 750.

“Currently, there are 13 million people with credit scores ranging from 580 to 680. Many of them are ready to own but are being left out in the cold,” Castro said. “The truth is that the dream of homeownership is out of reach for too many Americans.”

Castro urged policymakers to bring housing finance reform to the forefront of the national agenda. But analysts and industry officials aren’t optimistic about seeing any kind of movement in the near future, at either the legislative level or the lender level. 

“The problem is that lenders don’t want put-backs,” Humphries says. “Fannie and Freddie will guarantee, but when it goes into default, they’ll put it back to the lender and tell them to eat it.”

Mel Watt, director of the Federal Housing Finance Agency, the conservator that oversees Fannie Mae and Freddie Mac, made a step in the right direction by trying to clarify the rules surrounding warranties and risk in an address at the Mortgage Bankers Association’s annual conference in October. Still, a change in lender appetites won’t happen overnight.

“Lenders are only going to start lending once they get comfortable,” Humphries says. “That trust is really going to have to come from experience, which means it’s going to come over time. I don’t think there are any documents the GSEs can give lenders to make them more trusting.”

Retention Attention
As Castro tries to sort out the subprime fallout, multifamily owners, developers, and managers are toasting to the economic recovery.

The single-family market doesn’t pose much of a near-term threat, says Ken Veltri, senior vice president of asset management at AMLI Residential. The Chicago-based company reported a minimal increase in residents moving out to buy a home this year. In 2013, about 14 percent of the company’s renters moved out to buy a home; this year, that number rose to about 18 percent.

But Veltri sees a difference in losses to homeownership when  comparing suburban versus urban renters. In 2013, AMLI lost 20 percent of its suburban renters to houses. By late this year, the company was losing 30 percent of its suburban renters to the white-picket-fence space.

In downtown Chicago, however, says Veltri, “we have renters by choice—people who aren’t generally looking to move into a house.”  In fact, the percentage of urban renters moving out for homeownership has actually declined, from 10 percent last year to 8 percent this year. While Veltri isn’t sounding the alarm just yet, he’s keeping a close eye on national job growth. 

“What’s been starting to bite us here in the last few months has been people moving for job transfers,” he says. “It’s causing a lot of turnover with people who aren’t even having lease expiration. Most job transfers are going out of state, they’re not staying in the Chicagoland area. A lot of Illinois jobs have been lost to Texas.”

To address the problem, the company has been doling out smaller, and fewer, rent increases to keep occupancy stable, a trend many operators are following as the upturn matures and retention takes on greater importance. 

Renters by Choice?
San Francisco area renters would surely welcome a pause in rent growth. In many ways, the Bay Area is ground zero for the nation’s affordability problem. 

“While home prices aren’t affordable, the rental prices are even less affordable,” Humphries says. “All the households we’ve been creating there have been overwhelmingly renter households.”

But are they renters by choice? One of the factors holding back the for-sale industry is the pace of Millennial household formation, or the lack thereof. Many in that generation are delaying the decision to get married and have children, says Glenn Brill, a manager at Baltimore-based FTI Consulting.

“I think Millennials, once they [mature], will form households and families, and you may see them return to the suburbs,” he says.

High-end, luxury product, especially in urban cores, tends to have more renters by choice, says Darren Pierce, director of multifamily asset management at Charlotte, N.C.–based Crescent Properties.

“In our suburban, garden product, people are there for a year and then they buy a house,” he says. “In our urban product, people are there because they want the lifestyle of a rental. We provide the higher-end apartment communities, and that attracts a lot of renters by choice. Some of them lost money in the downturn on a house, and some choose to live with us because they like the flexibility.”

Although Pierce says owning will always appeal to families, he’s noticed a change in attitude and preferences among young, small families.

“We’ve even seen people who have one kid and are still choosing to live in a two-bedroom apartment because they love that lifestyle,” he says. “People have a lot of options. They may want to put their money elsewhere besides into a house.”

Toward a More Perfect Policy
But multifamily developers shouldn’t get too overconfident: Eventually, a large amount of Millennial renters will make the transition.

The “accepted wisdom” in the multifamily industry has been that Millennials aren’t as interested in owning a home as their parents. 

“And that may be true, but I think we’re too early in the game to definitely determine that there’s been some change in taste,” says -Deloitte’s Bachman. “I’m always skeptical that the Millennials are going to behave differently, because I’m a Baby Boomer, and if you go back in history and look at what was said about us, it’s that we were going to be different. We don’t know, and I have no reason to think, that Millennials will not go through some similar kind of cycle.”

David Olney, chief investment officer at Boston-based Berkshire Group, says that part of the reason Millennials are delaying their decision to form new households is the financial instability many of them face due to student loan debt.

“Millennials are carrying a lot of debt on their balance sheets already,” Olney says. “One of the mistakes made by the government in the boom period was to push a lot of people into the market to own a home who shouldn’t have been owning a home.”

Indeed, federal housing policy will need to be much more balanced going forward, but there are some inherent challenges. Nearly three-quarters of federal housing subsidy goes to homeowners (think of the mortgage interest deduction), yet the average income of a homeowner is more than twice that of a renter. 

“I think the government needs to be very careful as to what programs they put in place to support any one initiative,” he says. “Their push to have everyone own a home created much of the problem we saw in 2008. It’s taken us a very long time to recover from that.”