Will Renting Overtake Home-Buying?

This past May, sales of new homes plunged to the lowest levels seen since such data began to be recorded in 1963. June and July sales have been tepid. Are home sales likely to remain in a funk for a few years? Some demographers think it’s likely.

Around 1995, the rate of home ownership among Americans began to turn upwards, rising from 64% to a peak of about 69% in 2004.  Although demographics and low interest rates were undoubtedly factors in the increase, the spread of unusually lax lending policies throughout the mortgage industry contributed to a housing “bubble” and led to distortions in the level of home-buying across most of the nation.

Now, it seems, most of these factors have turned south.  Although mortgage interest rates continue to scrape past 40-year lows, a weak economic expansion and tighter lending standards have slowed the national appetite for home-buying.  The tax credit for home buyers provided a short-term boost, but now that the federal punch bowl is empty, the party-goers have departed.

According to a recent article in Barron’s (“Renter Nation”), demographic trends over the next five years should tend to drive home-ownership levels back to where they were fifteen years ago.  This projection is based on the observation that ownership tends to rise with age.  Households led by people under 35 tend to have the lowest rates of home-ownership (38.9%), while ownership rates jump among 35-49 year-olds and level off as householders get past age 50.

Peter Francese, former president of American Demographics magazine, projects that over the next five years the number of under-35 households will increase by 2.8 million, while households led by 35-49 year-olds will decline by 600,000.  Although there will be a huge increase of over-50 households — seven million — most of these are assumed to already be homeowners.  Thus the expected net trend is toward a lower national rate of home-ownership.  This need not result in plummeting home prices if the economy holds up, but does not portend another strong upward move.  It also suggests that rental housing occupancy rates should strengthen over the next few years.

Of course, it’s important to remember that this analysis represents national demographic trends, but housing market trends are localized.  Housing expansion in particular metropolitan areas will still depend on local demographic changes, local economic trends, and local home affordability.  An area with a strong economy, a disproportionate number of Baby Bust-generation residents, and reasonable affordability, could actually see an uptick in home sales.  But this will probably tend to be exceptional.  In an area like Boston, with low affordability and relatively little room for new housing, a shift from buying toward renting could easily take place.

About the author

Thomas Fisher, CFP®

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