In close to half of the largest U.S. cities, the majority of households now rent rather than own their primary residence, according to a new report from RENTCafé, a Yardi company.
The share of households that own their homes has now declined to the level last seen in the1980s and early 1990s. That’s been great news for the multifamily sector, as those would-be homeowners have filled up apartments.
The homeownership rate is likely to stay at roughly its current level for the foreseeable future due to recent changes in the tax code that favor renting over buying and the high cost of for-sale homes.
“Where we are right now is closer to the long-term average than in recent years,” says John Sebree, national director of the national multi housing group with brokerage firm Marcus & Millichap. “It’s going to stay within a healthy range.”
Renters dominate in more cities
Renter households now make up the majority in 42 of the 100 largest cities in the U.S., according to RENTCafé. That’s up from 20 cities where renters dominated within city limits in 2006. By 2016, renters took over in 22 cities, including key markets like Chicago, San Diego, Detroit, Austin, Texas and Sacramento, Calif.
Homeownership declined steadily in the years from 2006 to 2016. First, millions of homeowners lost their homes to foreclosure in the financial crisis. In subsequent years, new households were more likely to choose renting over buying because new houses were typically too expensive for first-time homeowners and financing was hard to find.
“Over the 10-year period we analyzed, rentership growth outpaced homeownership in 97 of the 100 most populous cities,” according to RENTCafé. The total U.S. population gained approimately 23.7 million people during the past decade. At the same time, the number of renters increased by 23 million and homeowners by less than 700,000.
The percentage of households that live in a home they own fell to its lowest point—62.9 percent—in the second quarter of 2016. That’s down from a peak of 69.2 percent in the second quarter of 2004, according to the U.S. Census.
Homeownership levels start to rise
The homeownership rate had begun to recover slightly in 2017 and reached 63.9 percent by the third quarter of last year.
That’s partly because the millennial generation is getting a little older. More millennials are reaching the time of life when people are more likely to buy homes. The oldest millennials, born in 1980, are now turning 38 years old. The peak birth year for millennials was 1990, and that cohort is now turning 28.
However, the recovery in the homeownership rate may stall in part because of the recent reform of the federal tax code. Because of the Tax Cuts and Jobs Act, passed by Congress in December, millions of homeowners will no longer deduct the interest they pay on their home loans from their taxable income, instead opting to take the increased standard deduction in 2018. For wealthier households, who are more likely to itemize their deductions, the maximum amount of mortgage interest they can deduct shrank by about a quarter.
Similar tax changes in the U.K. had some measurable effects. “It didn’t affect homeownership in the long-term, though it did tick down in the short-term,” says Hans Nordby, managing director for CoStar Market Analytics and CoStar Portfolio Strategy.
However, even without the changes in the tax code, the cost of new housing is still too high for many potential homebuyers. “It’s the price of the home that is the limiting factor,” says Nordby. In many markets, the sites once available for new residential construction have been built out and zoning rules restrict the creation of new housing.
“The homeownership rate will not rise much, if at all,” says Doug Ressler, director of business intelligence for Yardi Matrix. “Single-family and alternative home construction will remain at a low point since the plotted home sites do not support workforce housing.”