Falling Homeownership Rates’ Impact on Rental Housing
This August, the U.S. Census Bureau announced that the nation’s homeownership rates had hit a 51-year low, falling from 63.5 to 62.9% in Q2 2016 alone. Homeownership rates haven’t been this low since 1965, the earliest year for which Census Bureau data is available.
How have homeownership rates fluctuated over the past 5 decades—and what kind of impact do these trends have on the rental market? Let’s take a deeper dive into the data.
Homeownership Rates: By the Numbers
Historically, homeownership levels have hovered around 65%. They reached a peak in Q2 2004, when homeownership rose to 69.2% before leveling off. Rates have steadily declined since the housing crisis in 2007-2008. Most experts believed the decline had tapered off, which is why the Census Bureau’s latest report came as a surprise to many. Today, the national homeownership rate is just 62.9%.
Conversely, the number of renters is on the rise. An estimated 363,000 new renter households were formed in Q1 2016, compared to the same time the year prior—almost twice as many as the 177,000 new owner households formed during the same period.
Fast Facts about Today’s Renter Demographic
According to a study by the Joint Center for Housing Studies at Harvard University:
- In 2016, 37% of all U.S. households (representing an estimated 110 million people) were renters.
- The number of renter households soared by nearly 9 million from 2005 to 2015, the largest increase over any 10-year period on record.
- Renters have accounted for all net growth in households since 2005.
- The bulk of rental growth can be attributed to Baby Boomers—the generation added 4.3 million net new renters over the past decade. In comparison, Gen X added 3 million net new renters, and Millennials added just 1 million.
- More than half of city dwellers rent their housing, compared to 28% in suburban communities.
- One-third of renter households earn less than $25,000.
- Only 11% of renter households earn $100,000 or more.
- Families with children make up 31% of renters, compared to 27% of homeowners.
- Minorities and foreign-born households account for half of renter households, compared to just 25% of homeowners. The differences are particularly striking among black and Hispanic households, with each group making up 20% of renters but less than 10% of owners.
Homeownership Rates’ Impact on the Rental Market
The addition of 9 million net new renter households over the past decade is having a tremendous impact on the nation’s rental housing stock.
Rental Housing Supply
After the housing bubble burst, many investors found it could be highly lucrative to purchase single family homes that were underwater or being foreclosed upon. Many of these houses have been converted into rentals. Indeed, the nation’s single family housing stock absorbed nearly two-thirds of the decade’s renter growth.
Meanwhile, strong market conditions and historically low interest rates have fueled a boom in new multifamily apartment construction. Multifamily housing intended for rent climbed from a low of 9,000 units in 2009 to 370,000 units in 2015—the highest level since the 1980s. These units tend to be smaller in size than the apartments built in years past, with studios and 1-bedroom units accounting for more than 50% of all new multifamily units.
The bulk of new multifamily housing construction has taken place in urban areas. Over the past two years, an estimated 57% of new units have come online in cities, compared to an average of 45% in years past.
Rental Housing Prices
To put it bluntly, the shift from homeownership to renting has created a severe supply-and-demand imbalance that is driving rents up year over year.
According to U.S. Census data, between 1960 and 2014, inflation-adjusted rents rose 64%, while real household income only increased by 18%. The situation was even more challenging between 2000 and 2010, when household incomes actually fell by 7%, while rents increased by 12%. As a result, the share of cost-burdened renters (those spending more than 30% of their income on rent) more than doubled from 24% in 1960 to 49% in 2014.
“Rents have skyrocketed so much and incomes haven’t kept pace, so we have an affordability crisis in some of our major metropolitan areas for the middle housing market,” explains Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California Berkley.
As of September 2016, the national median rent for a 1-bedroom apartment was $1,120 per month. A 2-bedroom apartment averaged $1,280 per month, representing a 2.1% year-over-year increase. New York, San Francisco, and Boston are among the most expensive cities for renters, although Colorado Springs (9.1%), Reno (7.9%), and Stockton, CA (7.7%) have experienced the fastest-growing rents.
The inability of supply to keep up with the rapid rise in demand has led to the longest period of rental market tightening since the late 1960s. The national rental vacancy rate has fallen each year since 2010, hitting 7.1% in 2015, a three-decade low. Professionally managed apartment buildings reported an average vacancy of just 4.2% in Q1 2016, a 0.30% decline from the year prior. The bulk of the recent tightening has occurred within the Class B and Class C markets as real estate investors look for value-add opportunities.
Rental Market Outlook
Homeownership rates have already declined to a record low, but there’s reason to believe they might fall further still before the trend is reversed.
We can expect strong immigration to fuel the demand for rental housing. By some estimates, minorities will represent more than three-fourths of net new household growth over the next decade—and minorities are historically more likely to rent than to own a home.
Millennials will continue to boost the number of new renter households as they age, since half of Millennials are still in their teens. As more Baby Boomers approach their 70s, we should expect many older adults to transition into rental housing to meet their changing accessibility needs. (More on each generation’s rental and homeownership behaviors in our next post!)
Other social and economic forces will influence rental demand as well. High student debt, poor credit, and limited availability of mortgage credit will keep some from buying homes. Others may put homeownership on hold in pursuit of higher education and career advancement. Delays in marriage and parenthood will also deter some from buying a home in the coming years.
All things considered, it’s safe to say that rental demand will continue to be strong—if not stronger than it is today—for the foreseeable future.
Liked this post? Check out Part II, which digs deeper into the data to discover what’s behind changing homeownership trends in 2016.