The Generational Shift in Home Ownership
Home ownership may no longer be a goal of the next generation. We have seen a dramatic demographic and economic shift that will make renting rather than buying the new norm of families for years to come.
There are two questions we intend to address in this article. First, why has renting a home become more appealing? And second, why has buying a home become so difficult?
Renting a home – the next generation wants flexibility
First let’s look at the current demographics of a potential homeowner. According to the WSJ1 in 1960, nearly 75% of adults were married, compared with about 50% today. People now marry six years later on average, the divorce rate has increased, and the fertility rate has plummeted since the 1960’s. On a population adjusted basis, as a result, housing starts are at their lowest level in 50 years. This overarching demographic shift collided with the “Great Recession2” to stunt demand for home ownership.
Next let’s look at the obvious economic factors. The subprime mortgage crisis of 2008 created a flood of bankruptcies and short sales. These life altering events for those affected delayed any future home ownership for seven years after a personal bankruptcy, and three years after a short sale. During this same period, Americans have seen stagnant wages and sluggish employment growth. In addition, young adults have entered a workforce with less opportunity and more college debt than ever before.
The result of these shifts is less demand for single family homes, and more interest in renting cheaper apartments. The young adult population leaving their parents’ homes after the Great Recession has added to rental demand – and they want flexibility—be it in tenure at work or where they decide to relocate. The WSJ reports that “the share of new homes being built as rental apartments is at the highest level in at least four decades. Multi-family housing starts are up nearly 40% from a year earlier while single family starts have barely changed1.”
Buying a home – a financial and regulatory challenge
Why has buying a property become so difficult for this generation? There are a number of reasons, most of them macroeconomic in nature, and therefore, out of a homebuyer’s control.
Notably, bank lending is still extremely tight. Even with the Federal Reserve’s quantitative easing measures meant to swell bank reserves and pump money into the economy, many consumers and small businesses are finding it hard to qualify for a bank loan. Banks will attribute this to higher capital requirements and the regulatory backlash on consumer lending practices since the 2008 financial crisis. The Dodd-Frank Act along with other consumer protection practices have pushed banks to even more conservative lending practices. Every new bank loan is endlessly scrutinized and the cost of regulatory compliance has skyrocketed. Gone are the “loose” lending practices of subprime mortgage days past. While this is a good development, the consequence has been a very “tight” lending environment, leaving many qualified homeowners frustrated by the exhaustive application process only to be denied a loan in the end.
The combination of these things has put the “velocity of money” in the U.S. economy at a 50-year low. The velocity is the rate at which money changes hands in the economy. More specifically, the Fed induced low interest rates should increase demand for loans, and the private banking sector should increase the velocity of money in circulation to meet this demand. This has not happened as of yet. It will take private sector GDP growth, general inflation, and an uptick in consumer borrowing to reverse this money trend.
While consumer lending has been sluggish, institutional lending has not. Companies such as Blackstone and American Homes 4 Rent have purchased hundreds of thousands of homes across the U.S. recently—not to “flip”—but to manage as rental properties. They swept up these single family homes at bargain prices after the 2008 subprime mortgage crisis, paying cash or outbidding consumers using considerable leverage. Their strategy in this massive undertaking concurs with our primary argument as to why renting has become so appealing.
Once the excess supply of distressed housing was removed from 2010 through 2012, especially in Southern California, price appreciation bounced back tremendously in 2013. The result in the winter of 2014 was the lowest home inventory level in 12 years. This lack of supply has left many qualified home buyers looking to sell and trade-up in quite a conundrum. The Wall Street Journal, a global newspaper, actually reported on this issue as it specifically related to Encinitas and Carlsbad earlier this year! San Diego area prices were rising so fast and home inventories falling so low, that sellers could make a profit on their home sale, but couldn’t find something else affordable to buy. So many people are staying put and hoping that higher prices entice more sellers to list, creating a larger
inventory of homes available for purchase.
Conclusion on homeownership
A home may continue to be one of the largest assets in a family’s portfolio, but for the younger American, it may take more convincing than in days past. The demographic shifts and economic headwinds have made renting more appealing, and may be the new norm for middle class families of the future.
1 WSJ – Housing Numbers Reflect Shift in American Dream, 6/16/14
2 The “Great Recession” also known as the “financial crisis” or “subprime mortgage crisis” of 2007-2008.