Ominous question, isn’t it? There are all kinds of implications that go with that possibility, and none of them fit neatly within the economic progression of the past 30-40 years when it seemed the entire economy was running largely on the back of the real estate industry. But whether we like it or not, new trends in housing are beginning to emerge, pointing to a future that will likely see more renters—maybe far more—than in the recent past.
Though new construction of residential real estate has been showing definite signs of an upswing in the past few months, the encouraging statistics are far more important for what they hide.
An article last week, Rent Party! Apartments Drive Strong Housing Starts Data (Yahoo!Finance) reports a good news/bad news scenario on new residential construction. The good news: November housing starts are up 9.3% from October, and 24.3% over October, 2010. That’s an impressive turn-around.
But now the not-so-good news: though overall housing starts are up impressively, the stats for 1-4 family homes is actually down, dropping 1.5% from October, 2011.
So if home building is down from last year, what accounts for the increase in new construction? Apartments! Apartment construction (buildings with five or more housing units) are booming while construction of primarily owner occupied single- and small mutli-family homes are stuck at a recession level pace.
The economic implications of this shift are not lost on builders who are moving from the once reliable single family market to apartment construction. They’re on the front lines of the housing market, they see future, and they’re building to prepare for it. Obviously, they see the shift as part of a longer term trend.
(Update: The situation continues in 2013. Bloomberg reports in Housing Starts in U.S. Surge on Multifamily Unit Demand that new home starts finally topped 1 million in March of 2013 (compared to a pre-recession peak of 2.1 million) but single family starts actually fell by 4.8% while multi-family increased by 31%. Multi-family contruction accounts for about 40% of the new construction total. Meanwhile the percentage of Americans who own the homes they live in has fallen from a pre-recession high of greater than 69% to as low as 62%. This is the level that homeowership was at in 1960.)
The forces driving the rental market
The shift is being driven by a number of factors that insure it will continue for many years, among them:
- The foreclosure wave of the past 4-5 years is turning one-time owners into renters
- A stubbornly soft employment picture that shows few signs of significant improvement
- Lack of savings for down payments
- Excessive debt levels
- Tighter mortgage lending standards in the face of weak employment, low savings and high debt
- Flat or declining house prices have removed the imperative to own
- A reduction in new household formations, being driven by all of the above
The combination of these economic forces means that renting may become the New Normal for many middle class households.
How could this affect your own housing situation?
OK, we’ve listed macro-economic factors why renting is becoming more popular, but how does that work out on a personal level? If you’re tossing around the own-vs-rent question, why might you be better off renting? Let’s consider the above factors in light of personal circumstances.
Employment. This is a double-edge issue for most people. Not only can weak employment increase the possibility of losing your job, but finding a new one might require moving to a different city or state. How easy will that be to accomplish if you have a house that will need to be sold? Bigger picture though, how much sense does it make to sign onto a 30 year mortgage given that the typical job lasts only from 1-5 years? As a renter, you’ll have greater employment mobility, should that become necessary, and you can more easily move to a less expensive place in the event of an income drop.
Savings and debt. Since it’s no longer possible to flip houses every few years, you’ll have to live in your home much longer, and that will mean repairs—big ones as the home ages. Home repairs now cost well in the thousands, and often tens of thousands of dollars. If soft house prices mean you can no longer take a home equity line to make major repairs, then your house might eat up your savings and force you to tap credit cards.
Flat/declining house prices. Rising house prices have been the ultimate (but generally unspoken) lifeblood of the housing market. Not only has it dangled the possibility of easy riches for ordinary people, but it also morphed into the classic buy-now-and-beat-the-price-increase marketing strategy. It’s disappearance from the housing scene has a greater impact than is generally assumed.
Even if rising property values aren’t your primary motivation for buying a home, their absence will affect your investment for years to come, and maybe even forever. Let’s face it, from the 1970s through about 2006, millions of people did buy primarily for rising values. They were a significant force in the market, and their sudden disappearance means housing is no longer either a guaranteed investment nor even necessarily very liquid.
Foreclosures, tighter lending standards and slower new household formations. Even if you have no trouble qualifying for a mortgage for the home you want to buy, the fact that fewer prospective homebuyers can get a mortgage will impact your housing investment. Fewer qualified buyers means a smaller market for homes in general, and that will translate to slower/flat/declining price trends. Not only will your home be worth less in the future, but there will be fewer prospects to sell it to should selling become necessary.
Why should we think the shift to rental housing is in any way permanent?
Of course, none of us have a crystal ball, but I think it’s pretty safe to assume that the shift to rentals will continue for the foreseeable future. It’s not a fad, but a reaction to all of the economic forces we’ve covered so far, none of which are likely to reverse any time soon.
The weak employment front is being caused by long-term fundamental shifts, such as the off-shoring of jobs to lower wage countries, and the relentless advance of technologies that are reducing some fields and eliminating others completely. Meanwhile, it seems clear that low mortgage rates—the usual solution to a bad housing market—are having no affect at all.
In addition, we have to consider the very real possibility that future recoveries may look very different than they have in the past. Not only is it likely that recoveries won’t be real estate driven, but they may not benefit housing in any meaningful way either. The Baby Boom generation—the largest single generation in history—has moved past the prime home buying years, and many are now looking to downsize. Combining this with economic factors has the weak housing market looking, smelling and acting permanent.
Why we might not become a nation of renters
Part of the difficulty with home ownership right now is that real estate was at the center of the financial meltdown, and that situation is still actively playing out. While it does, renting is looking better all the time, if for no other reason than that flexibility is a huge advantage during a time of major change, and that’s exactly what we’re in.
None of this means that owning a home will have no value in the future, but how and when a home is bought will be the determining factor. If house prices continue to decline, eventually the cost of owning a home will drop down to a level where it will be competitive with renting, and maybe even cheaper. That will be the point where we’ll start to see a real recovery in housing.
Here in Atlanta where I live, new subdivisions that were priced in the $600,000-plus range five years ago are now advertising base prices of $350,000. The homes are selling at the lower prices! As price drops (to more realistic levels) move through the market, housing will finally stabilize. That won’t happen quickly or easily though, because many millions of owners of existing homes are still carrying the large mortgages that were based on much higher values. The ride down will be slow and painful, just as it’s been so far.
While that’s taking place, renting a home is increasingly looking to be the housing arrangement of choice. The building industry is betting their bankrolls it will continue.
What do you think about renting? Is it a viable alternative in the current economy?