I’m sure this is something you’ve seen in the news, or have been suspecting yourself.
Rents are increasing. The cost of living is skyrocketing. Immigration to the US continues to grow, which only increases the demand for housing.
Over the past few years, there has been a decline in homeownership and an increase in renter households. In other words, more Americans are renting.
This isn’t a recent trend, either. It’s been occurring over multiple years, and many economists and investors have been shouting from the rooftops about this shift.
In this article, we’re breaking down the scope of this phenomenon, and what it means for apartment investors.
Americans have a few options when it comes to their living situation.
They can purchase and own a home
They can rent
They can live with a family or a friend
Or they can be homeless
Most Americans will either own a home or choose to rent. Because of this, we’ll focus on these two groups in this article.
Now, it’s important to understand homeownership trends across time in order to understand what is happening now, and what will likely happen moving forward.
The rate of homeownership in the United States had a sharp increase post- World War II. When it finally stabilized, it landed at about 65% of Americans being a homeowner. That meant that the remaining 35% of Americans were renters. This trend pretty much remained until the mid-1990’s, when homeownership saw a sharp increase.
American Homeownership Rate (Source: DQYDJ)
It wasn’t until the mid-1990’s that homeownership increased dramatically. This was a response to government policies that made it easier for Americans to qualify for a mortgage and purchase a home. Subprime lending expanded, and homeownership in America reached a peak of 70%. There was a saying that if you could fog a mirror, you could qualify for a loan.
This allowed millions of people to buy homes that they otherwise wouldn’t have qualified for.
This obviously didn’t end well, and when the housing bubble burst, what came next was the Great Recession of 2007-2009 that impacted the entire nation and had ripple effects throughout the globe.
In hindsight, many economists and investors say that the crash was an inevitable consequence of irresponsible policies. The decade that came next saw a decline in homeownership in America.
Here’s a headline from 2016 that will give you an idea of what I’m talking about.
The US had not experienced something like this before. Homeownership rates were below the historical average.
The good news (sort of) is that homeownership rates began to recover after 2016. For a few years following 2016, homeownership began to steadily increase.
But as we fast forward back to the present, we know that this isn’t the case today. And there are multiple reasons why, which we will dive into.
But before we do that, let’s expand on some key metrics you should understand.
#1: The Housing Affordability Index
The National Association of Realtors puts out the housing affordability index using house prices and income data to determine if Americans on average are financially able to purchase an average house.
In previous months, we’ve witnessed a drastic drop in the housing affordability index. When housing becomes less affordable, more Americans need to rent.
#2: The Case-Shiller Index
This metric determines how American house values are changing per month. Housing costs have never been higher than they have been in recent months.
What Is Causing The U.S. To Become a Renter Nation?
As housing prices increase, and affordability declines, it’s no question why less and less Americans can afford to own a home. This is what has led homeownership rates to drop.
Looking to the future, the question is whether this trend will continue. Unfortunately for prospective homeowners, it’s looking like the answer is yes. Multiple factors are contributing to America becoming more of a renter nation, and many economists are arguing that this will be the case for the foreseeable future. Here are a few common reasons why they believe this is the case.
#1. Increasing Cost of Housing
As you saw above, the Case-Shiller Index has skyrocketed. It’s obvious that housing is not affordable in this country at the moment. It’s also important to highlight the rate at which costs have been increasing. Between Q2 of 2020, and Q1 of 2022, the median home price in the US had increased over $100,000.
The reality is that the cost of homes has increased at a faster rate than household income and even inflation. Many Americans were struggling to afford homes one year ago. Today, this dream is becoming even more unlikely.
#2. The Housing Shortage
There’s another factor contributing to the rising cost of housing. It’s the fact that there aren’t enough homes to go around.
About 1.53 million houses were built per year between 1968 and 2008. This is a pale comparison to the 936,000 houses built each year between 2009 and 2021. This represents a drop of over 38%.
And the bad news is that there is no indication that this trend will reverse or stop.
So since supply isn’t keeping up with demand, this drives demand for the existing supply up. And if you guessed that this contributes to higher prices for these homes, you are correct. When the price of houses on the market go up, this pushes people out of the housing market, and the renter population increases.
One solution would be to ramp up the construction of new houses. However, this is more complicated than it might seem at first glance. As inflation and supply chain issues have increased, the cost of land, labor, materials, and gas have shot up as well. The Fed’s recent rate hikes and widespread economic uncertainty only add to the hesitance among developers to start new projects, because these factors make real estate development appear riskier and less attractive.
#3. Rising Interest Rates
2021 was a good year for people taking out 30-year fixed rate loans. The average interest rate for these loans was 2.96%, among the lowest Americans have ever seen. But this changed in June 2022, when the Federal Reserve began increasing the federal funds rate by 75 basis points. This kind of hike hasn’t been seen since 1994, and this led to a sharp increase in interest rates.
Now, the same 30-year fixed rate loans have increased from 2.96% interest to over 7% interest.
Many economists believe that the Fed’s actions of increasing their federal funds rate will continue as they attempt to get inflation under control.
As a result, Americans may have to wait years for interest rates to return to where they were only a few months ago.
Now, what do rising interest rates have to do with the U.S. becoming a renter nation?
Well, as interest rates increase, the cost of taking out a loan to buy a house goes up. The mortgage payments to pay off the loan increase, making it more difficult for the average American to afford buying a home.
#4. Inflation To The Moon
Inflation has been increasing lately, and unless you haven’t been to the grocery store or a gas station in months, you’ve probably noticed.
Gas prices have never been higher. Airplane tickets have increased by 38%, electricity has increased by 12%, and chicken prices have increased by 12%. Going out to eat has become much more expensive.
And it’s no mystery why. Inflation hasn’t been this high in over four decades. This is sucking up consumer’s discretionary income, which leaves little money for things outside of basic necessities.
Let’s assume that the average American has a financial advisor. Financial advisors suggest that Americans shouldn’t buy a home that has a mortgage payment that’s more than 30% of their monthly gross income, and no more than 3x their yearly income.
$75,000 is the median household income in the U.S..
So, someone who is making $75,000 should only buy a house if it costs $225,000 or less.
Right now, according to The Zebra, the average house in the United States costs $348,079. By now, you can see why this is problematic for the average American household.
This is why renting has become more popular. It allows Americans to reduce or maintain their housing costs so they can afford all of their other basic necessities which are also increasing in price due to inflation.
America is Becoming a Renter Nation
Although Americans will continue to buy homes, it’s hard to ignore the evidence that more and more Americans are choosing to rent rather than buy a house. This trend is very likely to continue into the foreseeable future.
The Federal Reserve is expected to continue their rate hikes, which will continue to drive interest rates upward. Housing prices will also continue to increase. Inflation is only making these problems worse.
As a result, owning a home is becoming more unrealistic for the average American.
This only adds demand to the existing multifamily real estate in the market. As more Americans enter the renter pool, there is more demand for the limited supply of apartment units. And as we mentioned earlier, when demand increases, so do prices (or in the case of apartments, so do rents!).
Multifamily real estate has the ability to support the growing pool of renters in the U.S., and those who enter the market will reap the benefits of investing in multifamily while also helping provide housing for those that need it most.