The latest Census figures show a very dismal situation for the housing market. The US homeownership rate has plunged to a 48 year low and the pipeline for future buyers is simply not materializing. We’ve noted that in places like California the big push in prices has come in the form of big investors, foreign money, and the ever present flipper brigade. Yet this trend is not only a coastal phenomenon. Contrary to stucco box sarcophagus loving boomers, the US does not revolve around Southern California. Big shock, I know. Large metro areas around the nation are following a similar path. The next generation of home buyers are priced out and many are viewing homeownership as a lofty if not impossible goal. Rents continue to rise and thanks to the big buy by large investors over the past few years, inventory has been siphoned off the market and regular families have been left in the lurch. We are quickly becoming a nation of renters.
Rental Apocalypse is here to stay
Gallup recently published an interesting survey looking at the expectations of non-homeowners. This is really important because this will drive future home building and buying for years to come. I’m surprised at the speed in which financial amnesia floods California. The booms and busts are like bong hits. One day people are on a good high and the next, the market is imploding. Yet somehow, even recent history like 2007 through 2009 is viewed as some kind anomaly. The 1,000,000+ California households that lost their homes to foreclosure are left to lick their wounds and are ignored by the press. We rather hide that funky part of family history in the attic. We are all about winning even if it means leveraging every penny you have to be owned by your home. Apparently this memo is spreading across the country as seen by non-homeowner expectations:
The most important line here is the “not for the foreseeable future” jumping 10 percent from 2013 to 2015. Isn’t the rising stock market and housing prices being up good for everyone? Apparently not when incomes are not keeping up. And we put ourselves in a low rate predicament. The entire market is now conditioned to low rates. Even a minor hint of rates going up sends the market into a reality show meltdown with all the subsequent scripted drama that it entails. People are simply seeing homeownership as a more unlikely option. Millions of Millennials are living with mom and dad because they can’t afford to rent, let alone buy.
Because of this crushing blow to the middle class, the homeownership rate has hit a 48 year low:
Why this matters is that most Americans are horrible savers. A home is basically a forced savings account. And most Americans that have any sort of wealth have it locked up in housing equity. So with fewer Americans owning, this just means fewer Americans are going to build wealth. And it is going to be harder to build that wealth because rents are soaring upwards:
Rents have gone up more than 100 percent over the last 20 years. The general CPI has gone up 56 percent over this period. In some areas, rents have gone up by double-digits in the last year alone. Why the big disconnect? First, the CPI looks at the owners’ equivalent of rent that continues to miss any surge in home prices. It also fails to look at wages and is missing out on big items like student debt that is marginally represented in the basket although for many Millennials, is the biggest expense.
In the end we have a net increase of 10,000,000 renter households over the last decade while the number of homeowners has gone flat. That is a big shift and it appears to be continuing. With real estate prices now back near peak levels, many people are simply opting not to own.
Here in California, the change is even more dramatic. You have renters living in sardine like atmospheres with multiple roommates. Even tech workers are shacking up with each other in places like San Francisco. The options are simple: buy and over leverage to the max to get a crap shack (if you can), rent, rent with roommates, live with mom and dad, or move out of the state. All the trends are pointing toward this rental apocalypse continuing.