To Rent or to Own?
The Census Bureau reports that the U.S. homeownership rate dropped to 63.4 percent of households in the second quarter of 2015. This is the lowest homeownership rate since the mid-1960s, and it highlights the stark decline in the rate of homeownership that began prior to the onset of the Great Recession in 2007. With the last data point in 2015Q2, the decline in the homeownership rate shows no signs of levelling out. With a smaller percentage of households owning their homes, rental markets have tightened. Builders have responded with a surge in multi-family construction. Multi-family starts reached a 489,000 unit annual rate in June, well above the post-recession floor of a 58,000 unit annual rate in October 2009. But this is misleading. Despite the surge in construction, multi-family starts remain close to the historical average since 1959. Also, the U.S. population is now almost double what it was in 1959, so multi-family starts per capita are still low. The shortage of multifamily housing is evidenced by the steady decline in the rental vacancy rate, down to 6.8 percent in 2015Q2, well below the 11.1 percent peak of 2009Q4. And rents are rising. Lately, we have seen a barrage of reports that say that rents, particularly in major metropolitan areas, are climbing quickly, faster than wages are climbing. Yet, the consumer price index for rent was up just under 3 percent in2015Q2, over the previous year, close to its historical average since 1990. The relatively mild increase in rents given the rapid tightening of rental markets suggests that rents will keep climbing over the next year. Both sides of the rent-versus-own calculation are changing. Rents are going up, but mortgage rates are too, as are house prices and family incomes. I expect that the decision to rent or to own will remain challenging for millennial households despite the fact that rents are likely to keep rising faster than the overall CPI.