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America has become a “Renter Nation.” That’s the shocking news the Census Bureau confirmed this week, when it reported that the U.S. homeownership rate slumped to 63.4% in the second quarter.
How low is that?
It’s down from 63.7% from the first quarter of this year …
It’s far below the housing bubble peak of 69.2% in 2004 …
And it’s the absolute worst reading going all the way back to 1967!
Take a look at this chart and you’ll see what I mean – we’re talking 48-year lows for the “American Dream.”
But it’s not like tens of millions of Americans are living in the streets. Instead, they’re becoming renters – either by choice or necessity.
Some of that stems from tighter mortgage standards. While they’ve eased ever so slightly in the past couple of years, they’re nowhere near as easy as they were in the early 2000s.
Getting a mortgage or home equity loan involves multiple credit checks over a period of weeks, huge amounts of additional income and asset verification headaches, higher credit scores, and lower total debt-to-income ratios. That’s true even for well-qualified buyers and borrowers, not just those with credit blemishes. Trust me: I know from first-hand experience.
Lackluster income growth is another problem, as is the fact many younger potential buyers have insufficient down payment funds and meager savings. Many of them are burdened with high student debt loads, and are underemployed based on their education levels. That means first-time buyers are fewer and farther between.
Then there’s the lingering psychological damage of the housing bust, and the desire for more mobility among the typical first-time buyer demographic. Renting keeps them from being tied down – a desirable situation given the fact”jobs for life” are a distant memory these days.
The problem is, all those forces are driving rents much higher. We now have yet another housing affordability crisis, as the Wall Street Journal noted this week. Only this time, it’s one focused on RENTERS rather than OWNERS.
Things have gotten so stretched, in fact, that it may be time to make a swap. Either from renting to buying yourself (if you don’t own already), or to home building and related stocks from apartment Real Estate Investment Trusts and others levered to the multifamily market. Think of stocks like lower-end home builder D.R. Horton (DHI), rather than REITs like Apartment Investment & Management (AIV).
Advocating the purchase of real estate may sound kind of funny coming from a guy like me. After all, I was one of the most vocal analysts to flag the 2000s housing bubble well in advance — and I warned you off from housing and mortgage stocks before they imploded.
But the same dynamics that got wildly stretched in favor of renting vs. owning back then are getting much more stretched in the other direction now. So it makes sense to adapt, as both an analyst and an investor.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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very good
I blame this situation on the Federal Reserve’s low interest rates. So many middle class investors were afraid of entering the stock market after 2008 but have been desperate for return on their money, so they’ve been buying up available real estate year after year. That, in turn, has been pushing up housing prices as well as monthly rentals. I can’t wait for the Federal Reserve to raise interest rates this fall. IMHO, it’s about three years overdue.
While the FED screws around with markets and peoples lives, many are unsure of market direction. Retirees are living off savings or forced into higher risk levels. The other American dream of owning your own business is compromised by Washington interference. We were founded on FREE enterprise, not manipulated interference. The loss here is TRUST. Without a seat at the table, to know what is going to be messed up next, who could confidently invest in a home, a business or much needed jobs. We desperately need bureauocracy to get the hell out of the way so we can once again do what we are good at.
Ahhmen Howard!!
Mike,
So, if I purchase a House now and want to sell in say 8 – 10 Years, I have to wonder whether I would be able to Sell.
My theory goes like this, I believe it is All about the Monthly Payment when considering how much I can afford.
So if Interest rates go up from, say 4% to 7% in the next few years, a Buyer coming in to the markets now able to buy Less House in order to maintain that ‘Monthly’ Payment.
Wont this put Downward Pressure on the Prices of Housing?
If someone can afford a $200,000 Mortgage with 4% Interest Rate, ($953 for 30 Years) the same house would now have to Drop to $143,000 ($951 for 30 Years) if the Interest Rate goes to 7%.
Now what I am saying is, If I was buying a $250,000 House and had to put down 20% ($50,000) and had a $200,000 Mortgage, If I was to Sell 8 years from now, and House Prices came Down (because of an interest rate increase of 4% to 7%) for someone to afford the Same Monthly Payment, I would have to Sell the House at $180,000 so they could put 20% Down, which would bring them to the $144,000 Mortgage at 7% ($953 per month).
I would lose $70,000 in Value, made $91,488 in Mortgage Payments, paid roughly $2000 in tax (Supposedly the Average in the Country) per year, (another $16,000) PLUS Maintenance (Roof? Hot Water Heater? Heating Unit? Plumbing? Painting?).
And, when I go to Sell, I understand that a Nominal R.E. Brokers Fee is 6% and be prepared to pay another 3% in Closing Fees!!! (Another $10,800 for the Realtors and another $5,400 in Closing Fees!!!).
So, $70k Loss from Interest Rates Rising from 4% to 7%, $91k Loss in Mortgage Payments, $16k Taxes, Guesstimate of $2000 a year in Maintenance ($16k Loss), and another $16k in the Sale of the House.
To sum it up, for 8 Years, I would have Paid out $209,000 for a House selling for $250,000 at Today’s Prices (or $26,125 PER YEAR on Average!!!!), or $2177 per Month!
Sorry, but I am renting a Roof over my Head right now for $1200 per month with NO Worries, No Anchor (And I’ve moved a few times the last 6 years and have been paying and Average Monthly Rent of $1100 per Month / North of Boston for a 2 Bedroom Place).
Now, if I took that $1000 per month and put it in a Savings Account (Paying 0%) I would have SAVED $96,000 vs. Losing $209,000 (Yes, I could just say that the $953 Monthly Payment on the Mortgage could be considered a Rent Payment) and Therefore I ‘ONLY’ would Lose $117k!!!! On the PLUS Side $213k in 8 Years.
Oh, and I just Remembered, the Tax was just PROPERTY, not including Water, Sewer and Trash Removal…
By the way, Taxes are Higher than the Average here in the Northeast (which I know, You know, Mike), for Whatever Reason!
What I am concerned about, is I agree that Wages are Stagnant and may remain that way for a LONG Time. (Think Outsourcing).
I think we are stuck in a Rut, as we are now (Over the last 25 Years) in a Tightly correlated GLOBAL Economy, in which we are trying to compete with Workers Making MUCH Less.
I don’t see Inflation anytime soon, just ask the FED! If they can’t create Inflation with Zero percent Interest Rates, I have Serious Doubts they can influence Inflation by Raising Rates by 3% over the next few years… I believe Home Prices will start to Flat line, or even DROP, once Interest Rates Rise…
Please, tell me if I am Wrong or Missing Something, in my analogy of Renting vs. buying.
Oh, and I would like to add to my above comment. I agree that Money Starved Governments will be coming after More Revenue, through Higher Taxes.
I look to my North, into the State of New Hampshire. While they have No Income Tax or Sales Tax, they have Property Taxes that Average $3,643 while Massachusetts Average is around $2042, according to http://wallethub.com/edu/states-with-the-highest-and-lowest-property-taxes/11585/
Who’s to say Massachusetts doesn’t raise to an Average $2500 or $3000 per Year, or More!!!!
No, I’ll Pass on Buying! I Don’t Need the Anchor at this point.
Naw, I’m waiting for the crash. Lots of good deals for pennies on the dollar. Besides, why pay for a mortgage on a house that will decline in value. The Dow Jones is already down and home prices in many areas are stagnant. The Nasdaq keeps going higher, when it crashes, it plummets so quickly that one may not be able to liquidate fast enough. While I don’t necessarily buy the arguments of the “buy gold” pundits, I do think that what they are saying is true – just their solution is self serving.
Mike: I understand there is presently a big spike in multi-family construction permitting, and rents are going up a little at this time; but that won’t be sustainable, so if anything rents should come down. Mike, what is your take on construction over the next say two years and will renters be available and able to afford the rents. Or will this result in a new subsidized rent program by the government similar to Obamacare? Once a fool always a fool! Oh no, we would not want more of that!
Will
Here is another view…
http://dailyreckoning.com/rent-bubble-housing-bubble-rent-bubble/
America is becoming a Renter Nation! There are now more than 100 million residential renters and we are proud to rent our homes.