In 2011, during the high water mark of the foreclosure flood, an analyst at Morgan Stanley named Oliver Chang foresaw a sea change in the way Americans are housed. He coined the term “rentership society” to describe how the nation was moving from away from the culture of homeownership. Six years later, despite a vigorous housing recovery and the coming of age of the largest generation of potential homeowners, Chang’s vision is coming true.
Is the millennial miracle running out of time? Every year that passes with too many Millennials still living in rentals is another year without the sales, commissions, and new mortgages that demographers promised.
Two years ago, 2015 was to be the Year of the Millennial. Then, 2016 was to be the REAL Year of the Millennial. No one has yet shown the chutzpah to name 2017 yet another Year of the Millennial. Is a window of opportunity is closing?
Are the bulk of millennials missing ideal conditions for homeownership that they will ever see again: relatively affordable prices in the wake of the housing crash, low-interest rates, and soaring rents?
Some hard numbers:
- Though total home sales have flourished, the first-time buyer market share began to shrink in 2013 and today seems to be stubbornly stuck at 30 percent, the lowest level since 1987.
- Millennials have had little if any impact on the homeownership rate. After a minor uptick during the last two quarters of 2015, the national homeownership rate resumed its eleven-year decline to 63.5 percent, just one-tenth of a percentage point above last year’s 48-year low.
- Younger age groups are leading the homeownership decline. Homeownership among those 35 and younger fell from 47.5 percent to 39.2 percent from 2007 to 2015.
The worst may be yet to come. Real estate economists at the Wharton School of Economics are forecasting a further decrease in homeownership to 57.9 percent by 2050, but they believe it is possible for the homeownership rate to decline from current levels of around 63.5 percent to around 50 percent by 2050, 20 percentage points below its peak in 2004. Demographics, credit conditions, and the relationships between rents and housing cost increases account for the gloomy prognosis.
Millennials with homeownership dreams have endured much. The Great Recession sent many to live with their parents. Lenders responded to the financial crisis they helped create by raising lending standards to protect themselves at the expense of first-time buyers Investors have converted more than 5 million homes into rentals and are still looking for more. Move-up buyers can’t move up because either they lack the equity to sell or they can’t find an affordable home to buy.
Time will lower most of these barriers. New homes will slowly replenish inventories. Equity will return to even recovering markets like Las Vegas and Phoenix where foreclosures ravished home values most.
One huge barrier that time won’t fix is the rising cost of entry into homeownership. To young families struggling to keep their housing costs under control, home prices are rising too quickly. Since the first quarter of 2012, the median asking price for a home has increased 20.6 percent, according to the Census Bureau. Prices of affordable homes in lower price tiers have increased much more, especially in hot markets. During the same period, rents have skyrocketed. Over the past four years, the median asking rental prices have risen 46 percent per unit. Draconian rent increases have become a major motivation for millennials to buy. However, it’s much easier for supply and demand to lower rents than home values.
The multifamily construction boom
While first-time buyers have been stuck at a 30 percent market share, demand for rentals has boomed. Rental demand has increased by nearly 9 million households from 2005—the largest gain in any 10-year period on record. The share of all US households that rent, rose from 31 percent to 37 percent, at the expense of homeownership.
The record-breaking demand is about to meet record-breaking supply. When the bulk of the millennial generation started looking for rentals, developers and investors took note and began the greatest apartment building boom of the past 50 years.
Siting, permitting, and construction of an apartment building take 11 to 13 months, depending on the size. Buildings that were blueprints in 2013 are now opening for business. Last year, completions soared, reaching 306,000 multifamily units, the most new multifamily construction to come online since the peak of the Baby Boomer boom in 1987. Permitting for new multifamily continues to climb, up at a nearly 17 percent average annual rate through the third quarter of 2015, suggesting that as many or even more new apartment units will open for business in 2016 and several years beyond.
From 2005 to 2015, the total rental housing stock expanded by approximately 8.2 million units, about the same as total existing home sales over a year and a half. New multifamily construction was responsible for roughly a fifth of this increase, conversions of single-family homes from owner-occupancy and other uses accounted for the lion’s share of growth.
Some 5 million homes, largely the affordable starter home that is so in demand by millennials today, have been converted to rentals. Even though the foreclosure era has ended, conversions continue as investors profit from rising rents and appreciation. Investors’ monthly market share currently is about 14 percent, nearly half as much as first-time buyers.
Cracks are showing in rental rates
Rentals are soaking up much more demand that ownership properties, but cracks are beginning to show, suggesting that we are the cusp of a sea change in the dynamics of rentals vs. ownership. Home price appreciation is continuing to accelerate, surpassing forecasts and rising 5 to 7 percent this year, while the massive investments in new rental capacity are starting to show in the marketplace.
Rental growth has been slacking off since the second quarter of last year. Annual effective rent growth fell to 4.1 percent in the first quarter of 2016, an 89-basis-point decrease from the 5.0% a year ago and 52 bps lower than the 4.6% reported in the fourth quarter of 2015.
Rent growth has been moderating since the middle of last year. Source: Axiometrics
Zillow’s analysis shows home values outpacing rents this year.
MPF Research reports that they are seeing definite signs of cooling in certain markets, including the Bay Area, which has been the nation’s hottest apartment market for this cycle but is recording several months of easing rent growth numbers. Here’s analysis showing where rents are slowing in the hottest for sale markets (below):
Sources: S&P Case-Shiller and Rentonomics.
*Price increases are January 2015 to January 2016. Rent list increases are April 2015 to April 2016.
As strong as rental demand is today, it’s likely that new construction and continued conversion of single family homes into rentals will result in overbuilt markets, a chronic problem in multifamily housing. Rents are certainly going to flatten within the next few years, and even retreat as capacity outstrips demand.
Will cheaper rents usher in the “rentership society”? Or will they simply make it easier for those millennials committed to homeownership to save for down payments and bide their time in the hope of finding entry-level homes in their markets? For many young families, reasonable rents may leave them with no other option.