There are two themes I find endlessly fascinating about real estate. One is its enormous role in the financial crisis. 1 The other is the steep decline in homeownership after the crisis. Let’s take a closer look at some of the data, to see if there are any insights to be gleaned.
Many forces are behind the rise, including falling unemployment, soaring rents, increasing interest rates and millennials finally integrating into the workforce after so much difficulty during and for several years after the Great Recession. Let’s look at bit closer at each in turn:
However, after a long run-up, it seems to have topped out in many cities.
The result? The rent-versus-own analysis no longer overwhelmingly favors becoming a tenant, as it did for a few years after housing prices had taken off. Now, rents have caught up with buying, even for entry level properties.
Rising rates: Hard as it might be to recall, as recently as the 1990s, the 30 year fixed-rate mortgage ranged from a little less than 7 percent to as much as 10 percent. The Federal Reserve made its intentions clear last year that it was in the process of raising rates back to normal levels. That likely suggests an ongoing, gradual increase in the cost of borrowing to purchase a home. This creates an incentive to buy sooner rather than later.
That day has arrived.
U.S. Census Bureau data show that homeownership rates are highest for those householders ages 65 years and over (79.2 percent) and lowest for the under-35 age group (36 percent). But that 36 percent is significant, because it’s an increase from 34.7 percent a year earlier. As the Wall Street Journal observed, that “was by far the largest increase of any age group” over the prior year.
Part of this is those other factors mentioned above: more and more of the millennial generation is working, often in urban centers that have been seeing rapidly increasing rents. But as this group ages, more of its members are forming households. This often is a precursor to deciding to buy.
The state of housing is, to a great extent, being determined by millennials — after moving out of their parents’ basements and forming households, the next step tends to be having kids. The largest home-buying generation since the baby boomers is growing up. To a large degree that is what’s driving the market. And, I suspect, this demographic is likely to continue being the central force in the real estate market for decades to come.