Real Estate

Is the renting trend turning around?

US News & World Report
Devon Thorsby
The Fort Greene neighborhood of Brooklyn, New York.
Getty Images

National homeownership rates hit 50-year lows last year during the second quarter, slipping to just 62.9 percent, according to the U.S. Census Bureau.

Since then, rates have climbed slightly to 63.6 percent in the first quarter of 2017. This is 0.1 percent higher than the first quarter of 2016 before the drop, but it's a statistically insignificant increase year over year.

But is this upward trend an indication that homeownership is turning around in U.S. markets?

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It may be too soon to tell. However, current analyses are encouraging: Credit bureau and risk information provider TransUnion released an analysis earlier this month of people who shopped for a mortgage in the first quarter of the year – and 55 percent of them were first-time homebuyers.

That's up from the 35 percent of all homebuyers who were first-time homebuyers in 2016, according to the National Association of Realtors' 2017 Home Buyer and Seller Generational Trends report, which was released this March.

But before we jump to conclusions about residential real estate market, let's examine key factors that will determine the future of the renter vs. owner debate.

The Millennial Question

As the generation now coming of age, millennials are largely looked upon as the group to decide whether homeownership grows or shrinks in coming decades.

The downward trend of homeownership began with the housing bubble burst and subsequent recession starting in late 2007, which resulted in as many as 10 million families losing their homes to foreclosure nationwide, according to the National Center for Policy Analysis. Not only were homeowners unable to pay off existing mortgages, but younger people entering the workforce for the first time were unable to qualify for mortgages, as lenders had to restrict lending practices dramatically.

Without the funds to make a down payment or the credit to be approved for a mortgage, millennials opted to rent. And they continue to rent in many cases – the homeownership rate for Americans under age 35 was just 34.3 percent in the first quarter of this year, according to the U.S. Census Bureau. But the passage of time and, of course, the end of the recession has allowed those renting millennials to slowly build the wealth necessary to enter the housing market.

Mike Doherty, senior vice president of TransUnion's rental screening solutions group, breaks millennial renters into three groups: those who don't currently have the ability to buy, those who truly prefer to rent, which he notes has been the most highly publicized group, and those who want to own and will be able to in the foreseeable future.

It's the third group that's growing. The Transunion analysis of people shopping for mortgages found that 29 percent of nonhomeowners looking for a mortgage were millennials – up from 28 percent in the first quarter in 2016 and 27 percent for the same time period in 2015.

"What you're potentially seeing now is a little bit of a shift … towards nonhomeowners looking for mortgages. We may start to see a change in the trend of homeownership. Homeownership may start to increase," Doherty says.

Echoing that sentiment is Chris Nard, president of mortgage for Citizens Bank. He says the widely publicized view of millennials as eternal renters appears to be largely a generalization. "We vastly overestimated the impact on that group of people from the housing financial crisis," he says.

A Question of When

Even as more millennials are willing and able to become homeowners, or take steps toward it, the timing for growth in homeownership remains unclear. Is the rental renaissance past its peak, or will we see another spike in demand for apartments?

Nard points out that a slow pace for change in homeownership rates is a good sign. A sudden jump in the percentage of homeowners would be a result of drastically loosened lending practices, and it could spell out doom in the form of mass foreclosures for the housing market again in the future, which could be a symptom of bad economic times.

"I would look at [the homeownership rate] to be kind of a steady, on-growth trend. I think inventory and reasonable lending programs, post-financial crisis, keep you from seeing any big, unusual spikes in homeownership rates," Nard says.

Doherty also notes that there shouldn't be a sudden spike in rental vacancies. "You'll still have the increase in population, but as more people opt for homeownership, obviously the amount of supply [of new multifamily housing] you would need to add would not be as much as what's been demanded in recent years," he says.

Questioning the Market

For the very reason Doherty points out, it's unlikely the rental market will have more supply than demand, leaving newly developed apartment buildings vacant. But the high number of renters has caused rents to increase significantly – in many places, high enough for buying to become the better option.

"As rents have gone up fairly significantly in the last few years, homeownership, although it's gone up as well, it may have become relatively more affordable," Doherty says.

But the current state of the single-family housing market keeps many first-time homebuyers wondering about their options. The notoriously tight inventory is keeping some would-be first-time homebuyers from entering the market: either they're right on the cusp of being able to afford a home in their area and can't risk getting caught up in a bidding war, or they would simply rather wait out the seller's market a little longer.

For renters looking to buy in the hottest parts of town and in major metro areas, they may have to wait longer than expected. "We're going to see restricted inventory in essentially the attractive center cities for the next few years at least," Nard says.

Being the size they are, housing developments and apartment buildings aren't able to match the ebb and flow of demand as quickly as other things people rent or buy, like a car. Only time can reveal whether Americans are truly opting out of homeownership for good, or if renting simply served as a means to an end following the financial crisis.