Immigration and the Affordable Housing Crisis: What Forces are Driving the U.S. Rental Market?

Introduction

Driven by rising immigration combined with affordable housing shortages, the U.S. housing market is currently undergoing rapid change driven by rising immigration and an affordable housing shortage. These trends are reshaping the rental market, pushing rents higher while also creating new opportunities for investors. In this month’s newsletter we explore the data behind these shifts and how investors can capitalize on these developments.

U.S. Immigration: Boosting Rental Demand

The foreign-born population in the United States has grown substantially over the past 50 years. In 1970, it was 9.6 million, representing just 4.7% of the total U.S. population. By 2022, that number had climbed to 46.2 million, or 13.9% of the population, according to the U.S. Census Bureau’s report from April 2024. See the chart Number and Percentage Foreign-Born in the U.S. for details.

The foreign-born population now constitutes a significant portion of the population, particularly in key states such as California (10.4 million), Texas (5.2 million), Florida (4.8 million), and New York (4.5 million).

Meanwhile, in northern and midwestern states the foreign-born populations grew by more than 10% between 2010 and 2022. For example, Illinois has a foreign-born population exceeding 10%, while Minnesota (8.7%), Nebraska (7.2%), Kansas (7.1%), and Ohio (6.9%) are also seeing substantial growth. This represents a dramatic increase over the past decade or so.

Since immigrants are more likely to rent rather than own property, this surge has had a direct impact on the U.S. rental market. Vacancy rates have dropped as more immigrants enter the rental market. Rental vacancies have dropped, especially in cities with high foreign-born populations. This has created higher competition for the same number of rental units, driving rents upward. As the foreign-born population continues to grow these trends are expected to further bolster rental demand across many regions in the U.S.

The U.S. Census numbers quoted in this newsletter are based on the annual American Community Survey. Foreign-born are people who were not U.S. citizens at birth, including naturalized U.S. citizens, lawful permanent residents, temporary migrants (such as foreign students), humanitarian migrants (such as refugees and asylees), and unauthorized migrants.

Spotlight: Ohio

Ohio is emerging as a growth market, thanks to its increasing population and a significant rise in its foreign-born residents. Between 2010 and 2022, the state's overall population grew modestly, but the foreign-born population saw a notable increase of 25%, from 470K to 586K people. Foreign-born people now account for 5.0% of Ohio’s population, up from 4.1% in 2010. For real estate investors seeking long-term stability, Ohio is now the hot market for investing.

Developers’ Reluctance to Build Affordable Housing

Despite the rising demand, developers are choosing not to focus on building new affordable housing projects. Due to higher material costs, the price of raw land, and restrictive zoning laws, developers are prioritizing luxury units where profit margins are larger.

This mismatch between the prices of homes being built and the prices home buyers expect to pay was illustrated by a recent survey from the National Association of Home Builders. While 19% of buyers expect to pay less than $149,000, virtually no new home construction was actually started in this price category in 2023. In contrast, the data shows that a substantial share (72%) of all new home construction started that year was priced at $350,000 or more. See the chart New Home Prices vs. What Buyers Want for details.

In this chart, orange represents the buyers, and blue represents the percentage of homes started. There is a clear and observable pattern. Below $250,000, the share of prospective and recent buyers exceeds the share of new homes being built in those price ranges. In the above $250,000 categories, the opposite is true, indicating that the share of homes being built exceeds the share of buyers in the market at those prices.

The National Association of Home Builders pointed out that the incentives for affordable housing do not often outweigh the costs of these projects. This dynamic further exacerbates the affordable housing crisis and adds more pressure to the rental market.

The Affordable Housing Crisis: A National Shortfall

The U.S. is facing a severe shortage of more than 7.3 million affordable homes for extremely low-income renters, according to the National Low Income Housing Coalition’s 2024 Gap Report. This shortage is most acute among renters whose incomes are at or below 30% of the area median income, leaving only 34 affordable and available homes for every 100 extremely low-income households. The affordability crisis has worsened due to rising construction costs, rent inflation, and a systemic failure of the private market to address the needs of the lowest-income renters. Between 2019 and 2022, the shortage of affordable homes grew by over 480,000 units.

The rising costs of construction and the limited incentives for developers to build low-income housing have exacerbated the crisis. This has forced millions of renters into unaffordable housing, further intensifying demand for rental properties and turning some renters into squatters as they can no longer afford to pay increasing rents. Coupled with the increase in tenant’s rights legislation, these demands for housing will push many landlords into restricted renters to avoid costly litigations.

Being a lender instead of a landlord insulates your investment from the risks and hazards of an increasingly difficult to manage rental market where only the most experienced thrive.

What Does it Mean for Investors?

For investors, these market conditions offer a significant opportunity. First trust deed lending, secured by real estate collateral, provides a stable and predictable investment in a high-demand rental market. Unlike owning and managing properties directly, first trust deeds allow investors to benefit from rising rental demand while enjoying a secure, fixed return.

Safeguard’s competitive rates of return start at 10.5%. Choosing to be a first trustee lender is a great option designed to minimize risk while produce stable and predictable cash flows. This is especially true in our current high-interest environment where borrowers compete, and lenders win.

With over 20 years of experience, our team at Safeguard is committed to helping you navigate these turbulent times. To see available first trust deed lending options, you are welcome to fill out this form, reply to this email, or call us at 877-280-5771.