I first wrote on this topic back in 2012 (updated in 2013) when I posted Is America Becoming a Nation of Renters? What’s interesting is that while the real estate market has shown some improvement since then, the basic trend toward renting remains firmly in place. This is despite the cheerleading coming from politicians, economists, and of course the real estate industry. It’s even possible that renting is fast becoming the New American Dream. That may not be a bad thing either.
The Trend Toward Renting Represents a Fundamental Economic Shift
According to the US Census Bureau the homeownership rate for the first quarter of 2016 stands at 63.5%. That is, 63.5% of US households own the house that they live in. This is nearly six percentage points lower than the peak rate of 69.2% reached in 2004.
But that’s not the worst of it.
The homeownership rate is continuing to decline, having fallen 0.2% since the first quarter of 2015, when it stood at 63.7%. I thought we’re supposed to be in an economic expansion? This is one of those inconvenient statistics that casts serious doubt on the expansion theory.
But it gets even worse.
What’s No Longer Working, and Probably Can’t
The current homeownership rate is below where it was in 1995 (64.1%), a space of 21 years that featured three housing booms, stricter enforcement of the the Community Reinvestment Act, and a battery of creative mortgage financing that included subprime, zero-down and liar loans. All you needed to become a homeowner was a pulse.
But apparently, none of the official prescriptions employed by the US Government through the likes of its alphabet soup conglomeration of FHA, VA, FNMA and FHLMC have been able to reverse the tide. Nor more recently has the protracted (7 year) zero-interest rate policy (ZIRP) maintained by the Federal Reserve, that’s been instrumental in creating record low 3.something percent mortgage rates.
That’s because the prescription is all wrong, and always has been.
As Bill Clinton was famous for saying when he was running for election back in 1992, It’s the economy, stupid! Yes it was, and still is, despite Clinton’s propensity to drop slogans and doctrines when they no longer serve his purpose.
But that really is the case here. All of the smoke and mirrors employed to juice the housing market – under the bogus manta of “making homeownership more affordable” – have been stopped dead by the force of economics.
Cosmic Real Estate Reality #1 – The real estate market isn’t going anywhere without the economy. It’s a complete myth that the real estate market is in any way insulated from/independent of the real economy. Wall Street is (so far), but not housing.
Perpetually higher house prices, property taxes, homeowners insurance, utilities and repair costs have made housing unaffordable no matter how low they force interest rates. The economy lacks stability, living wage jobs, affordable health insurance and the ability of households to save money for a down payment.
The masses are gradually moving toward renting as an alternative. A chart published on DavidStockmansContraCorner.com this week, Chart Of The Day: A Nation Of Renters shows graphically how renter occupied housing as a percentage of total housing units has been steadily rising against the homeownership rate, since the homeownership rate peaked in 2004.
The politicians and the self-anointed geniuses at the Federal Reserve may not get what’s going on, but the masses increasingly do.
The Renter Phenomenon is Cutting Across All Lines
There’s a tendency to assign negative developments to certain sectors of the economy, or specific demographics within a population. Like Superman, who survives kryptonite by keeping it in a lead box, we put uncomfortable realities into a “box” and tell ourselves that it doesn’t apply to us, and will never affect us. But it’s starting to look like the renter phenomenon is cutting across both age groups and income levels.
In The New American Dream Under Obama: Renting (Investor’s Business Daily, June 9, 2015) reports that:
“…this decade is shaping up to be the strongest in history for renting…Households aged 45-64 have accounted for about twice the share of renter growth as households under 35…households in the top half of the national income range — where you expect to find high homeownership rates — contributed a whopping 43% of the growth among renters…”
The article takes specific aim at the policies under Barack Obama, but I think that misses the point. The problems with housing go back to the Clinton I and Bush II administrations. Both were looking to increase the rate of homeownership, primarily as a means of stimulating the economy. Those efforts largely put housing out of reach of millions of households, and contributed toward hollowing out the real economy and the middle class. Obama’s not innocent, but most of what he did was merely a continuation of the destruction wrought by his two predecessors.
Stimulating the housing market has become business as usual in America. But the effects are now negative, and the population is now voting with their feet, even if their words continue to support the status quo. That is, while everyone continues to sing the praises of homeownership, most of the action in housing is on the renter side, not the homeowner side.
The “Underwater Mortgage” Remains a Problem Years after the Mortgage Meltdown
The Financial Meltdown, and its subsidiary crisis, the Mortgage Meltdown, wiped out trillions of dollars in home equity between 2007 and 2010. And while the situation has improved since, it remains an undeniable problem seven years into an economic recovery.
CoreLogic reports that the total number of mortgaged residential properties with negative equity stood at 4 million homes, representing 8% of all homes with mortgages for the first quarter of 2016.
But the same report discloses what is perhaps an even more disturbing, but less publicized problem, “under-equitied” properties:
“Of the more than 50 million homes with a mortgage, approximately 9.1 million, or 18 percent, have less than 20 percent equity (referred to as “under-equitied”) and 1.1 million, or 2.2 percent, have less than 5 percent equity (referred to as near-negative equity). Borrowers who are under-equitied may have a difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are considered at risk of moving into negative equity if home prices fall.
To be sure, the CoreLogic report puts a happy spin on these numbers, emphasizing that they represent steady progress over the past few years. But let’s do some math. If 8% of all mortgaged properties are underwater, and an additional 9.1% are under-equitied, that means that 17.1% of all mortgaged homes in the US fall into the “at risk” category. Put another way, one out of every six mortgaged properties in the US is at risk.
We keep hearing about how strong the current housing recovery is, but it’s clear that something is amiss. Either the recovery has been exaggerated – which is not unlikely, given that statistical manipulation is now the norm – or the recovery has been highly uneven.
Whatever the official narrative is, it’s clear that many households aren’t buying it. And they’re not buying houses, preferring or compelled to rent instead. The trend is likely to accelerate in the next economic downturn.
The New American Dream: Why the Shift to Renting Isn’t a Bad Trend
I for one don’t see this as a negative development. It’s a positive reaction to a negative situation by millions of people. And being a renter has certain very definite advantages:
- It’s easier to move to follow a job opportunity in another city or state
- You don’t have to come up with a down payment
- Money that would go into a down payment or home maintenance can be saved and invested
- You won’t be hamstrung by a declining real estate market or a negative equity position
- If the place you now rent becomes unaffordable you can often move to a less expensive location
- It’s often easier to find rental housing close to work than it is to find a house
- You’re not at the mercy of interest rates, shifting underwriting guidelines or a freeze-up in the mortgage market
- Because of higher land density, large numbers of apartments and other forms of rental housing can be built/renovated/converted more quickly than constructing new single family houses
I realize this is an out-of-the-box position, but I believe that the trend toward a larger number of renters is probably absolutely necessary in order for both individual households and the economy to move forward.
What needs to change perhaps is the American attitude toward renting. Making a virtue out of necessity as the saying goes. Since renting is fast becoming the new normal, it’s time to make it a part of the New American Dream. Or to put it another way, to remove homeownership as a critical component of that dream.
What are your thoughts about the growing trend toward renting? Do you see it as a positive development, a negative one, or at least a positive reaction to a negative situation?