The Last Time Home Ownership Levels Were...

Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...

I’ll bet that some of you probably don’t know who LBJ was or when he was president. That’s not a slam by any means. Because he was president 50 years ago, before many, many of the people on this site were born.

I wrote a piece last year where I strongly suggested that it’s a bad idea to fight the trend. But “bad” doesn’t go far enough. It’s generally business suicide to do it.

So if you’re a real estate investor, the latest numbers from the U.S. Census Bureau should make you sit up and take serious, serious notice.

What did they report? They reported that the share of Americans who own homes is now at 63.4%; that it’s lowest level in 50 years; and that it’s been steadily declining since 2005.

In fact, if the homeownership rate drops just a few more tenths of a percentage point, it would reach a new all-time low since the government began tracking such data in 1965 and the rate was a flat 63%.

Got Your Attention Yet?

Good…

I read an article that stated that the downward trend would likely continue. It quoted some housing “experts” who said that it’s fairly likely the homeownership rate will continue to fall and that they will indeed hit a record low in the near future.

A Wells Fargo economist thinks that we may have another percentage point to go before we see a bottom, because we’re still suffering the effects of the housing collapse and the financial crisis.

bull The bull market and an improving jobs picture would seem to bring with it rising homeownership levels. But as a recent study pointed out, many would-be homeowners – particularly younger ones, in their 20s, 30s and 40s – are still struggling in the aftermath of the Great Recession.

Wages have been stagnant for the middle class, and many households are cautious about jumping into homeownership in the face of hefty student loan debt and memories of being burned in the housing crash. Rising home prices don’t help ownership levels, either.

Falling Homeownership

Fueled by easy credit, a booming economy and boundless optimism, the homeownership rate soared in the late ’90s and early 2000s, nearly hitting 70%. The 69.2% homeownership rate of 2004 is currently the all-time high, and based on how things were going, it very well could have remained as the record high for years or even decades to come.

But the homeownership rate started dropping in parts of 2005 and 2006, beginning roughly three years before the housing crash when the market was peaking. The rate declined steadily through the housing downturn. However, the rate did not fall as fast during the height of the housing bust as it did in the most recently completed quarter.

In the second quarter of this year, homeownership fell by 1.3% year over year, the fastest rate of decline for the quarter since the numbers started dropping in 2005.

The number of owner households decreased by 400,000 last year, while the number of renter households increased by 2 million. While that is a good sign for the rental market, a lack of home buyers is likely a bad sign that incomes aren’t keeping pace with rising home prices.

Renters Rule

The interesting thing, though, is that household formation is actually increasing. The number of occupied housing units grew, but all on the renter side. The number of owner-occupied units fell from a year ago. No wonder both rents and occupancies continue to soar.

In a recent earnings call, one REIT reported that for the balance of the year, they expect “accelerating apartment demand to support stronger performance across our business."

Multifamily apartment starts soared 55% in June from June of 2014. This occurred while single-family housing starts rose only 15%. And apartment supply is still far lower than demand. Annual rent growth hit 5% in the second quarter of this year, and apartment occupancy hit 95.2%, a near record high.

The Outlook

In a recent study, the Urban Institute said that homeownership rate would naturally fall to a level around 61 to 62% by the year 2030. The study also estimated that more 80% of the roughly 22 million households that will form in the 20 years to 2030 would be nonwhite households; people who tend to have much lower homeowner rates.

One analyst stated that while she also doesn't know what the right level of homeownership should be in the economy, she is concerned with the low rate of homeownership among African Americans, which is projected to fall to around 4%.

"Obviously, long term, homeownership has been a wealth-building vehicle for people," she said. “It basically puts so fewer African Americans in the position to do the wealth accumulation.”

So the trend is certainly down for homeownership. As a rental property owner, I’m seeing this first hand. After several lean years of no rent increases, and in some cases decreases due to job losses during the recession, this year I’m getting rent increases of at least 15-20%, and in once case a little more than 30%. I’m poised to have the highest rent revenue year per unit since 2006.

But what’s the play if you’re in the rehab business? If I were in your shoes, I’d look deeper into the Census Bureau report and also at the Urban Institute study on where all this is headed…