Renter nation: Part 1, homes are no longer an investment asset
America has become a renter nation.
Urban, dense, and rental
More specifically, to grow the American economy, we need to aim for a lower homeownership rate than we had in 2005, and probably a lower homeownership rate than we have even now. At the same time, we need to embrace a rise in the permanently affordable rentership rate as a national strategy goal. To do that, we’ll have to innovate on and expand the types and quantity of good affordable rental housing, especially in America’s growing cities.
Ours and everybody’s else’s cities are triumphing
The required shift in best tenure will remake our cities, reshuffle our spending priorities, and impel us to invent new tenure forms and configuration for multi-household housing.
Seven defining urbanization trends, from Ed Glaeser
This is happening now. Rents are rebounding even as home prices languish.
I’m up, you’re down
All this is thoroughly and logically explored in an excellent essay by Derek Thompson in The Atlantic (February 29, 2012), that starts in a sensible place, with an observable phenomenon of great significance:
The End of Ownership: Why Aren’t Young People Buying More Houses?
For most of us, a home is a consumption asset – something we use for our quality of life, like our car, laptop computer, or cell phone.
Consumption asset, getting smaller and smarter
Yet an owned home is also an investment asset – something we buy in the expectation of its generating economic benefits for us. And that requires someone else to buy the home from us when we’re done consuming it.
(Mobile homes are the purest example of an owned consumption asset – because their land value is severed from the structure, they seldom appreciate in value. Permanent affordable apartments are the best example of a consumption asset that enables economic accumulation, because renting is usually cheaper and you can set aside and invest the savings.)
Security of tenure (usually), but not appreciation
When older generations wonder what’s the matter with Millennials, they often judge their younger cohorts against such financial and social benchmarks as:
Finding a job.
Buying a home.
Yes, these are what most of us consider the baby steps of adulthood – and they are usually connected, though I’d add ‘having children’ – which, in today’s world, is not always connected to either finding a job or getting married.
These observations often come wrapped in weak science — “blame Facebook for their indolence” — or dripping with judgment — “blame their parents for making them weak.” The science is weak, but the observations are true.
Fewer young people are finding jobs.
Fewer young people are getting married.
Fewer young people are buying homes.
It takes no genius to realize that these three things are interconnected – and that we need not puzzle out which of them is the principal cause; they’re all linked in a demographic ecosystem, each influencing the others.
Houses are expensive. I’m not going to win an award for this observation, but there it is. The problem with expensive things, like houses, is that you can’t buy them with only your own money. You need somebody else’s money, too. This is why mortgages exist.
No more complicated than multiplication and division
The relationship works in the other direction, too – financing availability pushes up home prices.
In the years before the Great Recession, mortgages bloomed thanks to financial innovation. This was creative destruction, in that order. First came creation. The subprime boom was, in Karl Smith’s words, “a technological innovation that allowed millions of households to switch out of the market for multi-family homes [like duplexes] and mobile homes and into the single family market … [pushing] up the price of existing single family homes.” Then came destruction. This happened:
It’s not the up that hurts, only the down
Two things about that chart are especially important now: home prices are back to their historical equilibrium values, and those values have been rising, ever so slightly, relative to inflation. Housing is gradually becoming more expensive, but not so much more expensive as to explain the fall in home ownership rates.
Yet Mr. Thompson’s essay reveals just how long some of these waves are, and for how many years and decades they have been building.
Between 1980 and 2000, the share of late-twenty-somethings owning homes had declined from 43% to 38%.
Right there we have an anomaly: in a two-decade interval that saw a significant rise in the national homeownership rate, the percentage of homeowners under thirty was shrinking. Maybe our homeownership rise was nothing more than the migration to economic maturity of the boomer generation, and all our touted initiatives were merely window-dressing or credit taking for surfing the demographic wave?
We’ve controlled our destiny all the way in
It certainly looks that way:
The share of early-thirty-something home owners slipped from 61% to 55% in that time.
Though we didn’t know it, our rising homeownership was being driven by people in their 40′s and 50′s, meaning they were born in roughly 1955-1965.
After the boom and bust were over, both rates kept falling.
The decline in young home owners is a puzzling trend.
One might think so, but Mr. Thompson’s own data provides a depressingly clear explanation.
What’s the forecast, more depression?
Interest rates have steadily declined over the last 30 years. Mortgage lending has loosened. Women have ascended in the workplace and supplemented their spouse’s earnings. How in the face of all of these positive developments did home ownership among the young keep falling?
The rate of young people getting their first mortgage between 2009 and 2011 was chopped in half from just 10 years ago, according to a recent study from the Federal Reserve.
For this decline there is an easy explanation:
Such a skeptic
[Continued tomorrow in Part 2.]