Home ownership has always been the American Dream and a personal goal of almost every American. Our forefathers came to the New World in search of property and a home of their own. FHA and VA mortgage guarantee programs were created to promote home ownership and, more recently, at least two presidents ran on campaign promises to promote affordable home ownership opportunities. (Clinton & Obama)
But, according to the U.S. Census Bureau, homeownership in America dropped three percent in just the last seven years and rent is the new reality for both former homeowners and new households alike. Currently at sixty-six percent, how much lower will America’s homeownership rate fall?
Curiously, mortgage rates are at all-time lows while inventories are at all-time highs. Home prices are at record lows and mortgage interest remains deductible while rental rates are climbing and have never been deductible. A prudent shopper might easily conclude that it is a great time to buy a home yet, according to Reis, Inc., the apartment sector saw its largest quarterly increase in occupied stock of the year in the last quarter of 2011.
Is American becoming a renter nation? The short answer is “Yes” but a more difficult question is why and is this a short-term or long-term change.
For at least the 20th century, Americans operated on the belief that owning one’s home is better than renting it but careful analysis shows our collective belief is correct only under certain parameters. For instance, if a tenant reinvests his or her cash savings (i.e., mortgage payment less rent and down payment), then the tenant will usually have a larger portfolio balance in less than a decade than an owner, as recently published by Bercaha and Johnson.
However, if the “reinvestment requirement” is dropped and the tenant simply spends his or her savings on consumption – which is definitely the more realistic assumption – then owning a home usually produces more net worth than renting one.
In other words, it is not property appreciation which creates wealth today; it is the fact that home ownership is a self-imposed savings plan.
Another explanation for the recent drop in homeownership rates may simply be that the pendulum is seeking equilibrium. Home ownership rates are never static although the rate for my grandfather’s generation stayed around forty percent for much of the first half of the 20th century. History indicates that aggressive subsidy programs administered by FHA, VA, Fannie Mae, Freddie Mac and others drove the ownership rate to more than sixty-five percent for the World War II generation and baby boomers who followed.
Each generation makes its own housing decisions based on the world in which it exists and today’s millennials (born 1980 to 1995) live in a much different world than their parents or grandparents did.
For instance, changes in America’s workplaces and employment practices over the last twenty years have drastically altered how we view housing today.
Millennials have lived through the horror of their parents facing foreclosure or, at best, losing a lifetime of unreplaceable equity. Hundreds of thousands of baby boomers have openly and vocally longed for more flexibility in their housing arrangements when their factory downsized or relocated. And, with foreclosure notices posted on neighbor’s doors and talk show features about a “shadow inventory” and short sales, there remains a widely-held opinion that home prices have not hit bottom end. Would you buy your first home in such a world?
Even with low mortgage rates and deductibility of mortgage interest, many of today’s prudent shoppers are convinced that renting is a much better choice today than owning. In fact, many experts feel today’s disposition toward renting is likely to persist for at least a decade if not for a generation. Others talk of long-term homeownership rate in America of fifty-five to sixty percent instead of today’s mid- to high-sixties.
But, as Chuck Swindoll preaches, “Opportunities are often disguised as impossible situations.” Whether well founded or completely irrational, today’s bias for renting is creating opportunities for today’s savvy investors.
The rental market is on a tear and individuals are buying properties at deep discounts every day and then renting them to others for handsome returns.
In our portfolio, rental occupancy tightens a little more every day which means the creditworthiness requirements for the applicant pool tightens every day too. Today’s new tenant is one of the most qualified and most educated that we have ever worked with.
With nationally recognized employers bring new well-paying jobs for white-collar contractors into our area regularly, the demand for rental housing here can only get better.
The “New Normal” in real estate is rental housing.