Is Renting Becoming the New American Dream?

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.

Is Renting Becoming the New American Dream?
Is Renting Becoming the New American Dream?

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 #1The 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 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?

( Photo by Amit Chattopadhyay )

13 Responses to Is Renting Becoming the New American Dream?

  1. The fact remains that in spite of the unemployment rate being falsely low, more people now are out of the workforce than ever before. And too many young adults are saddled with student loan debt that they are trying to pay off –I won’t get into them wanting me to pay it off through loan forgiveness demands and promises by the democratic candidates — while tending bar or waitressing at Applebees. When people aren’t working, or earning sufficient income, they can’t pay a mortgage, real estate taxes, homeowners insurance etc. It is the economy, but it is also academia that can charge outrageous tuition, and the government taking over the student loan industry allowing students to have unlimited loans. Until this country returns to some saner policies, this problem will continue to exist.

  2. Hi Kathy – What the establishment media, politicians and industry moguls don’t get is that all of those rising expenses compete with housing. If you’re paying more for college and healthcare, you won’t have money for housing. Homeownership is fast turning into a virtue that few can afford. We’re moving rapidly toward a middle class who will rent, and probably never completely retire. Meanwhile they cheer lead the declining unemployment number, ignoring the fact that millions have completely dropped out of the workforce, and that most of the new jobs don’t pay a living wage or benefits. It would be economic suicide to commit to homeownership in that environment.

  3. My wife and I have been married for almost 32 years. For most of that time, we have always been homeowners. We moved to the Northeast about 2 years ago and ended up renting as we did not find anything we wanted to buy. It was a difficult adjustment to become a renter as we could not the home the way we wanted. However, we have probably saved a fair amount of money as we have avoided various maintenance and repair costs that our landlord has had to pay. Further, there have been a few new job opportunities that have come up for consideration. If I was tied up with a house, I would be giving that a second thought. I just might remain a renter for a longer period of time given the advantages.

  4. Hi Jim – Renting is really more of an emotional adjustment. It’s getting over the idea that you MUST own, otherwise you’re somehow less than completely legitimate. That’s probably a societal mentality that we all adopt to one degree or another. Renting has major financial advantages, as well as providing greater mobility.

    I personally think most people would be better off renting for retirement. It eliminates the need to pay for major repairs, and leaves you free to move to either a retirement destination, or to be closer to family, friends and children. It would also make it easier to shift into some sort of assisted living situation when the time comes. You might want to continue on the current path, but try to accept it more emotionally. It’s definitely not without advantages.

  5. Kevin, We started AmeriSus back in 2009 after being involved in hundreds of housing and development projects where we saw firsthand people buying what they could not afford. As a result our focus was on reducing the cost of what is typically the largest cost item in one’s monthly budget. That’s the cost to buy, own and maintain a home. Now seven years later we are the leading company creating smaller eco-homes that cost less than the norm. Along with that we were the first to put in place a unique home leasing program called HELP (Home Eco Lease Program) where some of our homes are leased just like a car with a nominal down payment, lower monthly payment for a term of five years. At the end of 5 you can renew or move. Want to move early, pay an early termination fee just like with a leased car. I won’t go into the details, but it is really difficult, especially in modern times, to run a pro forma where home ownership is a good investment. Our buyers spend much less each month than with a traditional mortgage, end up with extra money in savings each month. Some have even invested in our Social Impact Income Fund yielding a guaranteed 11% APR. Keep Up the Good Work!

  6. Thanks for the information Charlie. Maybe the efforts of your organization will restore economic sanity to the housing market. It’s been missing for a long time. Having been in the mortgage business in the past, I saw the give-away programs that set people up to fail with loans they couldn’t afford. And back then, it was very difficult to decline a loan, even a bad one. It was as if owning a house became a societal right, rather than the serious obligation that it is.

  7. Kevin,

    The hard part will be if I decide to take one of the opportunities that have come my way. My wife has been very tolerant of our moves in the past (which has helped me to grow my career). I think with the next move, she will want to put down roots for the long term and that will compel us to debate the buy versus rent.

    I will say that it will feel great not having to worry about selling a home this time around.

  8. Just keep in mind Jim that in this economy, and particularly if it gets worse, making another move may be a necessity, no matter how settled you want to be. The economy is changing in dramatic ways.

  9. The good news is that I would only be moving by choice and not other factors. We have our retirement fully funded and I have the proverbial “golden parachute” should my job be eliminated. The other opportunities are interesting as it just ads even more wealth and could put us near family. We just have to see how it plays out.

  10. I don’t see the rent vs own being a good or bad option. Each has its pluses and minuses. Everyone, regardless of age, has different circumstances. If you like where you live and intend to stay many years, buying is likely better. If you’re not sure of your long term plans, renting provides flexibility. If you have a strong urge to own real estate but your long term plans aren’t clear, their always investment property or REIT. Do what’s better for you.

  11. Except that fewer people actually have a choice anymore. I’d say that if your financial situation looks at all shaky you’re better off renting. This is not a time for excessive optimism. The last recession sent a lot of people to the perverbial poor house, and we shouldn’t think it was a one-off event.

  12. Perhaps the upward trend in renting is due to people wanting to make a substantial down payment instead of a minimum down payment with the added benefit of having smaller mortgage payments. Having more equity and smaller payments makes it easier (not guaranteed though) to weather a recession. If you’re a two earner family, try to live the lifestyle of just ONE of those incomes! Difficult? perhaps. Impossible? No.

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