Current Housing Market Yielding Renters Rather Than Buyers
Lost in the metrics and talk of the housing market, is the psychological change happening under the surface. Much like stock investors went through not one buy two anguishing crashes in a decade, the severity of the housing crash is going to have an effect on psyche for many many years. And unlike the stock market, which is skewed to a relatively small portion of the population, the housing market is much like the energy market – everyone is a part of it; 2/3rds of households are indeed ‘owners’. In the broader sense it will be interesting to see how risk averse those Americans currently in their 20s become over the next 1-2 decades, facing a worst in a multi generation job market, nearly half decade housing bear market, and a stock market prone to a Federal Reserve induced boom bust cycle. When you see these issues affecting one’s parents, and yourself as you enter adulthood, it must pull on some chord.
Specific to the housing market, this story is yet another that showcases the attractiveness of the apartment/rental market now and in the coming years, as more Americans no longer see housing as the ‘sure thing’ it was for decades. With mortgages now requiring more than “$0 down!”, the lack of savings across many households is going to be yet another headwind for the housing market – much easier to put a month or two deposit down on a rental than 3-10% of the purchase price of a home.
- A growing number of Americans can’t afford a home or don’t want to own one, a trend that’s spawning a generation of renters and a rise in apartment construction. Many of the new renters are former owners who lost homes to foreclosure or bankruptcy. For others who could afford one, a home now feels too costly, too risky or unlikely to appreciate enough to make it a worthwhile investment.
- The proportion of U.S. households that own homes is at its lowest point since 1998. When the housing bubble burst four years ago, 31.6 percent of households were renters. Now, it’s at 33.6 percent and rising. Since the housing meltdown, nearly 3 million households have become renters. All told, nearly 38 million households are renters.
Among the signs of a rising rental market:
- — The pace of apartment construction has surged 115 percent from its October 2009 low. It’s still well below a healthy level. But permits for apartments, a gauge of future construction, hit a two-year peak in March. By contrast, permits for single-family home are on pace for their lowest annual level on records dating to 1960.
- — The number of completed apartments averaged about 250,000 a year before the boom. They fell to 54,000 last year and will probably number around the same this year. But then the number will likely double to about 100,000 in 2012 and hit 250,000 by 2013 or 2014, according to the CoStar Group, a research firm. The lag is due to the time it takes for an apartment building to be completed: an average of 14 months.
- — Demand is driving up rents. The median price of advertised rents rose 4.1 percent between the end of 2009 and the end of 2010, census data shows. Few expect the higher prices to stem the flood of renters, though. One reason: Younger adults don’t value homeownership as earlier generations did and many prefer to rent, studies show.
- — Rental housing is giving builders more work just as construction of single-family homes has dried up. Still, that economic lift won’t make up for all the single-family houses not being built. Apartments account for only about one-fourth of homes. And renters are outspent roughly 2-to-1 by homeowners, who pay for items from lawn care to remodeling and help drive the economy.
- Many younger Americans see owning as risky. It hardly seems the best way to build wealth, especially when prices are falling. “There’s been this idea for years, a part of the American dream, that owning a home improves and strengthens communities,” said John McIlwain, a senior fellow at the nonprofit Urban Land Institute. “But what we’ve learned over the past few years is that many people simply are not ready to own a home.”
- In the past four years, the median price of a single-family home has sunk 37 percent, by $57,500, to its lowest since 2002. Yet in some areas, owning is still too expensive for many. “It’s becoming so difficult for most Americans to afford a home, with larger down payments and tighter credit, that it is creating a renter’s nation,” says Robert Shiller, a Yale economist and co-creator of the Case-Shiller home price index. “The home is no longer an investment; it’s a burden.”
This is a guest post written by Trader Mark who runs the blog Fund My Mutual Fund.