America is becoming a nation of renters. What will the impact be?
According to new data and trends far more American households are now renting than ever before. How is that impacting the real estate market? What will it mean for the economy? What does it mean for you own future, and for real estate investors?
According to the numbers from Freddie Mac homeownership is still down, and more individuals and families are renting. There are now almost 50% more households renting their housing in America now than in 1984. Data from the US Census Bureau and Moddy’s Analytics shows the share of renters has increased since 1980, and probably since the USA was first established.
This trend only appears to be gaining steam too. 1.2M new households were formed in the first 3 quarters of 2016. 74% of them have chosen to rent instead of buy homes. Analysts also note that a significant number of seniors and retirees now rent versus own as well.
Freddie Mac and others believe these trends will only increase already record demand for rentals in the US in the foreseeable future.
Renting & The Real Estate Market
There has been a substantial turn in the US property market since 2005. In the early 2000s relaxed lending made it far easier to jump into homeownership. That has changed. Much of America’s existing housing stock, including former condominium buildings and single family homes have been converted to long-term hold rental investment properties.
This has sapped an extra large chunk of inventory from the market. Whereas it was common for owners to trade up every 5 years or so, now there is less supply to choose from. The National Association of Realtors points to this as the main cause of rapidly rising home prices. On top of this there are millions of vacant homes across America, as well as a substantial amount of shadow inventory at banks and asset managers, waiting to be processed as foreclosures and REOs.
Rising demand and fewer options has also quickly driven up the rental market. San Francisco average rents have capped out at over $4,000 per month. Even the once affordable Dallas Forth Worth Metro area has seen average rents rising to $1,700 per month in 2017. Freddie Mac predicts that the average rent growth in 2017 among the top 70 metros will be just 3.4%, with a 5.2% vacancy rate. However, it has not been uncommon to see rents jump as high as 10% in a single quarter in some parts of the country.
While some watchers have expressed concern over rising amounts of new construction, the latest data suggests builder may be barely delivering 50% of the units needed to keep up with demand. While the market is currently starting and delivering slightly more apartment units than in the busy days of the early 2000s, these numbers are still 20% to 50% lower than in the mid-1980s. A rush in completions may temporarily provide a short window of relief for renters, it is expected that this inventory will be rapidly absorbed.
The Economic Impact of a Renter Nation
America’s homeownership rate is now one of the lowest in the world. It has been declining since 2004. That puts us just about Germany and South Korea. Only around 63% of American households own today. According to Wikipedia 90% of Cubans and Chinese own their homes. 80% of Mexicans own, and 96.4% of Romanians own their homes.
Aside from missing out on key benefits of homeownership, the effects of becoming a renter nation can include missing out on stability, a decrease in consuming household items, and unpredictability for local governments and their budget needs. Those missing out on current low interest rates and home prices will forever be at the whim of landlords and how much they want to charge. At some point in the future this could lead to the need for government intervention, either in the form of more rent controls, hundreds of billions more in annual housing subsidies, or as Mark Zuckerberg has suggested – a universal minimum income to be paid to residents.
There can be good reasons to rent for short periods. Having been burned by multiple bank scams and market manipulation, many are afraid to buy. Yet, long term renting can be very expensive. If you retired today with $260,000 in savings, and planned to use it up for the next 30 years, you’d have $722 per month. Remember that even in Dallas the average rent is already $1,700 per month, more than 200% of your monthly income. That doesn’t include buying food or water, or paying to keep the lights on.
Contrast this with being a landlord who controls local market rents, and may have 10, 20, or 100 renters paying for their assets and lifestyle. Even in the worst case of another temporary downturn in retail home sales, there will only be more demand for rentals.
What will you do to control your future?