By Frank Rolfe
Recent studies show that home ownership is on a path to decline to around 61 percent of households by 2020, which is the lowest level in half a century. If current trends continue, America could cross the line into having more renters than homeowners in the years ahead. That brings up the question: what is the impact of the U.S. becoming a nation of renters?
Certain doom for single-family home values
Single-family homes have never made much sense from an economic perspective. You can rent homes for far less than the cost of a mortgage, property tax, insurance, repairs, etc. And that does not even include the cost of the down payment. The only reason that people buy homes is the pride of being a homeowner, coupled with the perception that they will be priced out of the market as values keep rising. In a declining market, the sense of urgency is removed and prices plummet. The current run-up in home prices since the 2007 mortgage collapse is being called the “second bubble” and will no doubt burst shortly. New, stringent mortgage regulations, brought on by the 2007 mortgage collapse, will keep most marginal and first time buyers deprived of the option of buying a home.
With the theory of supply and demand, the higher the demand, the higher the price. As we transition into a nation of renters, expect rents to increase. That effect is already visible in the apartment market, as the average apartment rent in the U.S. has climbed to $1,150 per month. The increase in rents will also hit mobile home parks, duplexes, RV parks and any other rental property. How high can the rents go? There’s really no limit, as there is only law known as “rent control” in a small number of states, such as California. So there’s no limit to rent increases other than simply what the market will bear. Since you have to have a roof over your head, expect the market to bear a continual barrage of rent increases with no push back.
More construction of apartments
It’s already happening in most urban metropolitan areas: new apartment construction. It is estimated that around 210,000 apartments will be built in 2015, following a total of 238,000 in 2014. These apartments are renting virtually as fast as they can be built, as most new household formations have only rentals as an option. There is also a huge push from Baby Boomers downsizing into rental housing. The only sector that has no new construction is the mobile home park arena, and that’s due to local ordinances that do not allow new mobile home parks to be built. As a result, mobile home rents, in particular, should rise briskly going forward.
More population movement
Another byproduct of becoming a nation of renters is a much more mobile population. If there’s no house to sell, then there’s no barrier to seeking employment anywhere in the U.S., or retiring to any locale. Areas that offer good quality of living and strong employment opportunities will show significant population improvements, while those that offer a poor living product will lose people at a fast pace. Indeed, there may be giant shifts of population in the U.S. in the years ahead, in quantities that have never been seen before.
The U.S. is on a path to becoming a country of renters, rather than homeowners. Watch for opportunities that are created as a result of this trend, and stay away from megatrends that can hurt your investment dollars.
Frank Rolfe has been a commercial real estate investor for over 30 years, and currently owns and operates nearly $500 million of properties in 22 states. Visit him online at www.CREUniversity.com.