By: Jeff Ball, CEO, Visio Financial Services
I recently attended a small, invitation-only roundtable on the state of the U.S. residential real estate and mortgage markets. Participants included industry thought leaders across the market landscape, most notably representatives of the Federal Reserve and the Consumer Financial Protection Bureau (the "CFPB"), leaders from Fannie Mae and Ginnie Mac and major investment firms representing trillions of dollars of investment capital. Press was excluded so the conversations were dynamic. I'm grateful for the opportunity to listen and learn, and thought I'd share a few of my high-level takeaways.
Renting Outpaces Home Ownership
Renting instead of owning is in vogue, and that is unlikely to change soon. The U.S. homeownership rate dropped from 69 percent to 64 percent during the great recession. For the real estate and mortgage markets, a lot is riding on whether that trend will reverse. The same might be true for real estate investors looking to redevelop properties into long-term rentals. It looks like a variety of forces will continue to work together to hold down home ownership.
Americans Make Less Income Overall
One relatively long-term trend is that the average American is getting poorer. We are earning less in inflation adjusted terms, and we have less wealth overall. Take a look at this recent Federal Reserve Bulletin entitled "Changes in the U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances." This report shows that the average American is reducing their debt load and debt servicing load. But if you dig a little deeper, what you will find is that the average American household's standard of living over the past thirty plus years has been driven in large part by (1) the move toward dual household incomes; (2) steadily declining interest rates; and (3) increasing availability of consumer credit. Item 1 is a one time event, with the switch to two incomes now solidly in place. Interest rates can't go much lower, so item 2 likely has run out of gas. Our financial ingenuity never ceases to amaze, so I'm sure we'll continue to innovate new consumer credit products, but that too must eventually come to an end.
Generation Gap Drives Housing Market
Our barbell-shaped demographics are another factor when thinking about the future of the U.S. housing market. The baby-boomers are retiring. Many will downsize by choice. Some will downsize because they've not saved enough for retirement. At the other end, we have the millennials broadly defined as people born between 1980 and 2000. (Did you know that millennials, by most researchers' measures, outnumber the baby boomers? I didn't.) Millennials are getting married later, having kids later and buying homes later. Many believe millennials actually may not want to own a home at the same rate as previous generations, or want to own the same type or size of home as previous generations. I actually think this makes some pretty good sense. In our increasingly global, technology driven economy, just about everything moves more freely than it did 25 years ago. Our tax code and government subsidized mortgage rates incentivize home ownership, but many millennials recognize that mobility is an asset. Owning a home establishes roots and can serve as a forced savings plan, but owning a home also can make it harder to move toward the best job opportunities.
Displacement of homeowners during the financial crisis has driven up demand for rental homes and their corresponding rents. Some of those folks will return to homeownership. Nonetheless, for the reasons mentioned above and some others that have gone unmentioned in this brief article, there is good reason to believe we'll see growing demand for rental homes for the foreseeable future.