Struggling Rental Market Could Usher in Next American Housing Crisis

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A housing crisis centered on the vast apartment and home-rental markets is emerging in the U.S., threatening to send millions of renters into eviction and leave landlords short billions of dollars.

A large number of renters have been unable to pay some or even all of their rent since March, when the pandemic temporarily shut down most businesses. Many businesses remain closed or only partially open, pushing renters into unemployment and draining their savings.

Federal and local eviction moratoriums have protected many of them from losing their homes if they missed payments during the pandemic. But the national eviction ban and some state and city protections are set to expire by January or sooner. Renters will then be on the hook for months of missed payments, which even those who have jobs could struggle to pay.

Estimates of total outstanding rent debt vary widely. Yet by any measure, the fallout from missed rent payments is bound to imperil a large swath of the U.S. population and wash over the broader economy.

A study of unemployed workers released last week by the Federal Reserve Bank of Philadelphia calculated outstanding rent debt would reach $7.2 billion before the close of 2020. Moody’s Analytics estimates that it could reach nearly $70 billion by year-end if there is no additional stimulus spending. The economic-research firm calculated that 12.8 million Americans would then owe an average of $5,400 from missed payments.

Even the larger figure would be far less than what was lost when the $1.3 trillion subprime-mortgage bubble burst, leading to a national wave of defaults and foreclosures. But the tens of millions of people potentially caught in a web of home-rental debt and eviction would far exceed the 3.8 million homeowners who were foreclosed on in 2007-2010.

The ballooning debt issue for renters is another sign of how Covid-19 is punishing the less well-off far worse than the more affluent.

Most Americans financially secure enough to own a home are feeling flush, despite the economic downturn and a high unemployment rate that has spared most white-collar professionals. Houses are selling at record rates, and home prices have rarely been higher. Recently moribund suburban-housing markets in the Northeast and other regions have sprung back to life as buyers seek more space while working at home.

But about a quarter of American renter households with children are now carrying debt from not paying rent, U.S. Census Bureau surveys show. Women and people of color are disproportionately more likely to owe rent, according to the census data. Black and Latino Californians were twice as likely as their white counterparts to face rent insecurity amid the pandemic, an analysis by the University of California, Los Angeles found.

Mounting rental debt could also impede the path to a U.S. economic recovery, when 30 million to 40 million people from New York City to San Francisco face potential eviction once moratoriums expire, according to estimates cited by federal government officials.

“These households will have to make some pretty massive financial choices and pull back on other spending to pay their rent,” said Mark Zandi, Moody’s chief economist. “That’s a hit to the economy.”

In the early weeks of the pandemic, many renters tried to scrape together their rent by borrowing money from friends or family. Some moved to credit cards, which could mean the total debt tied to rent is greater than what can be counted from missed payments alone.

Credit payments to small and medium-size businesses connected to rental real estate increased by more than 70% in the spring, according to the Philadelphia Federal Reserve. The data showed that through the fall these payments have remained some 50% higher than during the same period in 2019.

Kate Bulger, a financial counselor specializing in housing debt at the Money Management International counseling firm, said the number of tenants she works with who report putting payments on credit cards has exploded. This shift of debt from landlord to plastic can harm renters’ credit long term, Ms. Bulger said, by using too much of their available credit line, which can lower scores.

“Even if now they are able to make their rent payment,” she added, “that huge inflation to their credit-card debt has become a new threat to their budget and their ability to cover all their expenses.”

Other renters falling behind are now on payment plans arranged with their landlords, allowing them to pay small minimum amounts each month. Some landlords are charging punitive late fees on top of what is already owed, making the debt higher than just the face value of the rent.

In Miami-Dade County, Fla., Isis Bouzy is struggling to make the $665 monthly payment for the apartment where she raises her three children. She lost hours as a hair stylist during the pandemic and now owes $2,175 back rent. She says her landlord wants to evict her.

She has lived in the unit for five years and said she had been working to fix her credit before the pandemic started. “I’m not sure where this will leave me,” she said. “I want to be a homeowner one day, and an eviction won’t look good.”

The financial consequences of falling months behind on rent can linger for years, and most landlords are unlikely to forgive these debts, credit specialists say. “If you don’t pay it back that can escalate to things like judgments, potential garnishments against your wages.” Ms. Bulger said.

This kind of negative information on a credit report also makes it more difficult to secure new housing accommodations, and future landlords could require a higher security deposit or advance rent payments.

Even some higher-income renters are falling behind. An analysis of rent payments in 11.5 million professionally managed rental apartments shows that unpaid rent was 7% higher in those buildings between April and August this year than it was during the same months in 2019.

While many landlords have let tenants continue to occupy units without paying all of their rent by establishing payment plans, there are doubts about how many tenants will ever be able to pay back all of what they owe.

“Am I concerned that some tenants will leave me holding the bag? Yes,” said Robert Nelson, a New York City landlord who owns middle-income apartment buildings. “But what choice do we have?”

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