Lower homeownership rates are rapidly becoming the new normal and, according to some commentators, the decline may last until at least 2030.
Before you start panicking, let's put things into perspective. The homeownership rate peaked in 2004 at 69.2 percent. By 2010, that figure had fallen to 65.1 percent, according to a report from the Urban Institute. By 2030, the homeownership rate is predicted to hit a low of 61.3 percent, a drop of a further 5.8 percent. Of course, people still need somewhere to live, so the other side of the equation is the renting rate. That's set to surge by around 4 million people over the next decade and a half. In other words, 13 million Americans will rent their home, but only 9 million will buy.
What do these figures mean for home sellers and buyers?
Let's take a look.
Home Buyers
If you are in the market for somewhere to live, you basically have two choices: buy a home or rent a home. And the fact is, it is becoming increasingly expensive to rent. Since 2010, the average rent has gone up by around 15 percent. If you are unlucky enough to be apartment hunting in New York City, your rent today will be 51 percent higher than it was five years ago.
By contrast, the average income of renters rose by just 11 percent over the same period, according to research published by the National Association of Realtors. If the figures continue to rise at these levels, the gap between monthly rent and monthly salary will become unsustainable and something will have to give.
Why would anyone choose renting over buying under these conditions? The primary factor is cost - specifically, the amount you have to save upfront to buy a new home. In March 2016, the median home price stood at $188,900. Anyone taking out a conventional mortgage with 20 percent down would have to find a staggering $37,780 upfront-a figure that is out of reach for many home buyers.
The good news is, low-down loans are back in town, with the FHA, VA and even Fannie Mae and Freddie Mac backing loans with down payments as low as 3 percent. This gives qualifying home buyers with smaller savings a real shot at homeownership. And, with the 30-year fixed-rate mortgage rate standing at a historic low of just 3.59 percent (April 2016), once you have qualified for a loan, your monthly expenses likely will be much cheaper than renting.
How much cheaper? Around 35 percent cheaper, according to figures from Trulia. That's before you factor in the tax breaks and the prospect of your home going up in value which, together, paint a sweet picture for anyone considering buying a new home.
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Home Sellers
While a number of factors determine your chances of a successful home sale, one factor outweighs all the others-the number of willing buyers in the market for a new home. When you have more buyers than there are properties for sale, sales happen fast and prices usually increase. That's because buyers pay full list price or even enter into bidding wars to secure their dream home. They also move fast, because when inventory is tight they don't have a bunch of standby options if the sale falls through.
Conversely, when you fewer sellers than the number of homes for sale, properties linger on the market and prices tend to drop. That's because buyers have plenty of choice. If you don't drop your price, buyers will choose the less expensive property down the street.
So does the plummeting pool of buyers spell doom for home sellers? Not at all. To see why, you have to delve deeper into the data.
The first thing to look at is who is dragging down homeownership rates. The answer is clear: Millennials, the generation born roughly between 1980 and 2000. Resoundingly, this generation is choosing renting over owning. When Millennials reach their peak home-buying age in 2030, it is expected that three out of ten of them will own homes compared with almost half of baby boomers at a similar life stage. There are plenty of reasons for this, including higher youth unemployment rates and rocketing student loan repayments, both of which make getting a mortgage much harder. Plus today's young people stay in school longer, get a job later and have children later. These things delay their decision to buy a home.
This is good news for the current crop of home sellers. Why? Because these demographic shifts will not impact the market until around 2030 and you should have sold your home by then! And the Millennials that are in the market for a new home? They are young, enthusiastic, employed, mortgage-qualified and financially speaking, light years ahead of the rest of their generation. These factors make them your ideal buyer.
The final point to make is that, even in 2030, taking 60 percent of the Millennials out of the home-buying pool is hardly a disaster. That's because the inventory of new homes for sale is at a 40-year low. In particular, the country is experiencing very low levels of new home building at the entry level. Simply put, there's not much for first time home seekers to buy. Which puts all the power in the hands of the home seller.
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Conclusion
Lower homeownership rates can seem startling, but it's nothing more than a media headline. The real estate market is so much more complicated than the picture given by a single statistic. Counterbalanced against the falling housing inventory, it is clear that a small drop in homeownership rates has failed to knock the market out of balance.
Looking forward, even at 61.3 percent the US would still have one of the highest rates of homeownership in the world. That's great news for home sellers and a sure sign that the housing market is set to remain buoyant for many years to come.
