How Financing Restricts the Rental Housing Market

In a piece for Strong Towns, Charles Marohn seeks clarity on the many rumors swirling about the U.S. housing market. “If we listen to those concerned about housing affordability, rents are already too high and may only go higher. If we listen to those concerned about housing finance, panic sits just under the surface because rents are about to collapse. Can both of these narratives be true?”

Marohn explains how the way that multifamily residential buildings are financed has a lot to do with rent costs and supply. “The way you make money in commercial real estate today is by leveraging lots of debt. This is one of the reasons that just 25 developers were responsible for one in four multifamily units started in 2022, an astounding level of concentration in a market with over 60,000 developers.”

Marohn notes that the current system of commercial debt worked for property owners and lenders for decades. Now, things are coming to a head. “There are many reasons why there is such hyperventilating over higher interest rates (I mean, we are ridiculously overindebted at all levels of society), but one enormous reason is that it forces the issue on commercial real estate. When the loan is rolled over, the numbers don’t work anymore.”

According to Marohn, it’s possible that lower interest rates made it easier for investors to withhold real, vacant apartment from the market to restrict supply and drive up rents. “If you think building more units in this same top-down, financialized system is going to fix things, you’re stuck in the housing trap. There’s only one way out: a bottom-up revolution in how we deliver lots of units at prices anchored to local capacity.”