(Bloomberg View)—There are two themes I find endlessly fascinating about real estate. One is its enormous role in the financial crisis. The other is the steep decline in homeownership after the crisis. Let’s take a closer look at some of the data, to see if there are any insights to be gleaned.
Homeownership in the United States peaked in 2004, when 69.2 percent of all U.S. households owned their dwellings. The rate bottomed at 62.9 percent in the second quarter of 2016, a level not seen since 1965. But here what really interesting: the rate has since risen sharply to 64.2 percent.
Many forces are behind the rise, including falling unemployment, soaring rents, increasing interest rates and millennials finally integrating into the workforce after so much difficulty during and for several years after the Great Recession. Let’s look at bit closer at each in turn:
- Employment: As was reported this morning by the Bureau of Labor Statistics, the job market continues to improve. The unemployment rate is a very low 4.1 percent, with steady gains in construction, health care and manufacturing. And with the labor market showing undeniable signs of tightening, wages are starting to tick up, rising at a 2.9 percent annual rate last month, the fastest since mid-2009.
- Rents: Ever since the financial crisis, rents have been rising nationwide. It is a little tricky capturing data on this, which comes from a variety of private sources (Rentonomics, REIS, Trulia and Miller Samuel) and vary in what they measure and methodology.
However, after a long run-up, it seems to have topped out in many cities.
The result? The rent-versus-own analysis no longer overwhelmingly favors becoming a tenant, as it did for a few years after housing prices had taken off. Now, rents have caught up with buying, even for entry level properties.
- Rising rates: Hard as it might be to recall, as recently as the 1990s, the 30 year fixed-rate mortgage ranged from a little less than 7 percent to as much as 10 percent. The Federal Reserve made its intentions clear last year that it was in the process of raising rates back to normal levels. That likely suggests an ongoing, gradual increase in the cost of borrowing to purchase a home. This creates an incentive to buy sooner rather than later.
- Millennials: The idea that many were averse to homeownership peaked a few years ago. But this was never a very credible argument. This would assume that this population group was in some way fundamentally different from the generations that had come before. As I noted in 2014, “The economy will one day improve, and the millennials will move out of their parents’ basements. When that happens, expect to see homeownership rates move back higher.”
That day has arrived.
U.S. Census Bureau data show that homeownership rates are highest for those householders ages 65 years and over (79.2 percent) and lowest for the under-35 age group (36 percent). But that 36 percent is significant, because it's an increase from 34.7 percent a year earlier. As the Wall Street Journal observed, that “was by far the largest increase of any age group” over the prior year.
Part of this is those other factors mentioned above: more and more of the millennial generation is working, often in urban centers that have been seeing rapidly increasing rents. But as this group ages, more of its members are forming households. This often is a precursor to deciding to buy.
The state of housing is, to a great extent, being determined by millennials -- after moving out of their parents’ basements and forming households, the next step tends to be having kids. The largest home-buying generation since the baby boomers is growing up. To a large degree that is what’s driving the market. And, I suspect, this demographic is likely to continue being the central force in the real estate market for decades to come.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.
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