The U.S. housing market is undergoing a significant change of ownership.
Home ownership in the U.S. has hit a 50-year low and, despite institutional investors scaling back real estate investment, housing prices continue to climb. In the third-quarter of 2016, the median price of a single-family home or condo reached $223,500 – just 1.5% shy of pre-recession levels. The market also saw a sharp increase in a growing demographic of investors: "landlord buyers."
In 2016, 37% of home sales were to buyers who did not reside in those homes, which is a 21-year high, according to ATTOM Data Solutions. "Though prices in several markets are nearing pre-bust levels, the composition of both the supply and demand of today’s real estate market is starkly different than a decade ago," Alex Villacorta, VP at Clear Capital Analytics, says. "As such, it’s imperative for all market participants to understand the nuances of the New Normal Real Estate Market."
Source: ATTOM Data Solutions and ClearCapital.com
Should "Landlord Buyers" Be Worried?
The rise of the landlord buyer at a time when real estate prices are nearing record highs is raising eyebrows. In the aftermath of the financial crisis, it was the more savvy institutional investors who entered the distressed housing market. As housing prices rose, this sector began scaling out of property investment and landlord buyers began to flood in. In 2012 institutional investors made up 7.8% percent of the real estate market; today, that number is just 2.9%. "A housing recovery that is highly dependent on real estate investors is a bit of a double-edged sword," Daren Blomquist, senior VP at ATTOM Data Solutions says.
"Rapidly rising home values have been good for homeowner equity, but also have caused an affordability crunch for the first-time homebuyers the housing market typically relies on for sustained, long-term growth," Blomquist adds.
Abating these concerns is that the majority of landlord buyers are people who have already paid off their own mortgage and see a second home as an investment. Their high home equity should help sustain a period of uncertainty in the housing market, especially with an abundance of renters out there to fill those investment properties.
Why Is Homeownership So Low?
Home ownership in the U.S. fell below 63% in 2016, the lowest level since 1965. Theories on this trend range from stagnant wage growth and lofty housing prices to high student loan debt and even behavioral issues, especially among Millennials.
Source: FRED database
Home ownership peaked in the years preceding the Great Recession of 2007-2009 and has been in decline ever since. As unemployment rose, wage growth slowed as employers benefited from the excess supply of workers. Those Baby Boomers (and Gen X-ers) who did not sell out of the market in a crash-induced panic have since prospered as equity prices have climbed in excess of 300% from the crisis lows.
But the Millennials, the group who would ordinarily be a high proportion of homebuyers, especially first-time buyers, were at an earlier stage of their lives and still getting their financial house in order. And they, of course, are the generation most affected by rising student loan debts, a factor many see as a hindrance to home ownership. Currently 44 million Americans have student loans with the average class of 2016 graduate leaving college with $37,172 of debt. (See also: Share Your Future Income for College Tuition?)
Or is some other force at play? Writing for "The Australian" newspaper, Bernard Salt took a swipe at Millennials and their spending habits. "I have seen young people order smashed avocado with crumbled feta on five-grain toasted bread at $22 a pop and more," Salt wrote. "Shouldn't they be economizing by eating at home? How often are they eating out? Twenty-two dollars several times a week could go towards a deposit on a house." (Further reading: Money Habits of the Millennials)
The Bottom Line
While the changing dynamics of the housing market may raise some red flags for the new "landlord buyer" demographic, the growing market for renters – both Millennials who can not afford to buy and seniors who are downsizing – will provide sufficient demand. Additionally, investment intentions for a "landlord buyer" are geared toward passive income for retirement, not a leverage play, as was the case for many home investments before the Great Recession.
The million dollar question remains: When will the homeownership trend reverse? A good guess is when Millennials pay off their $1.4 trillion in student debt. Then, they'll be ready to read How to Buy Your First Home: A Step-By-Step Tutorial. That reversal could calm those who worry that a shrinking proportion of homeowners – and a growing number of renters – isn't good for communities and the nation.