While the American dream has traditionally been one of homeownership, more and more Americans are seeing that dream slip from their fingers. Much of that trend can be attributed to continued fallout from the housing crisis of 2008. While the economy has largely recovered in most part of the country, many would-be homebuyers still find it increasingly difficult to buy a home or simply no longer see the benefits associated with homeownership. Further complicating the situation is the fact that there is a growing divide between social classes in America.
For the first time since the late 19th century, America is now home to more and more sharply divided classes. As a result, there are now fewer and fewer homeowners. In 2002, homeownership peaked at almost 70 percent. According to the U.S. Census Bureau, homeownership dropped to 65 percent in 2013, reaching the lowest level in almost 20 years. While some of this decline could simply be attributed to corrections following the abuses related to the housing bubble, that explanation does not tell the entire tale. Numerous other factors may also be responsible for the decline in homeownership, including a drop in first-time homebuyers, rising housing costs, and income levels that have remained stagnant for several years.
Consequently, as homeownership has declined, there has been tremendous growth in the number of renters over the past five years. Although optimism in homebuilding has increased, a significant amount of that activity stems from builders and developers constructing multifamily properties to meet the growing rental demand.
At the heart of the issue are the some 10 million people who lost their homes in the wake of the housing crisis to foreclosure. For many years following the housing crisis, those former homeowners had no other choice but to rent. Many of those renters may now be eligible once again to purchase homes, but the fact remains that not all previous homeowners are ready and willing to step into the role of homeowner once again. For many, renting has simply become the more logical and even economical choice.
The sharp decline in homeownership is even more intensely congregated in certain demographics. For instance, while homeownership among the elderly has held fairly steady, homeownership has experienced a sharp decline among younger consumers, particularly those in the 25 to 44 age group, as evidenced by the chart below, courtesy of the U.S. Census Bureau.
Clearly, this is far more than just a coincidence, indicating a trend toward America becoming a nation of renters. As we see from the chart below, the amount of renter-occupied housing as a percentage of total housing units has steadily increased since hitting a record low in the second quarter of 2004.
While the number of renters is on the rise, the number of homeowners has declined significantly. This represents a sharp move from the typical housing situation in the United States, in which homeowners have historically outnumbered renters. In fact, during the 2010s, renter household growth has grown at a faster rate than in any other decade.
As we can see from the chart above, the United States added about 500,000 renter households annually during the 2000s. That trend almost doubled beginning in 2010, when the number of renter households increased to about 900,000 per year until 2014. This was most certainly not due to a sharp increase in the nation's population, indicating that other trends are at work here.
During this same period, a small increase in homeownership took place among people in the 35 to 54 age group. There was also a significant decline in homeownership among the 25 to 34 age group, as many young people fresh out of college found that they could not even afford to rent let alone buy and were forced to move back home with their parents.
According to the chart below, the largest rate of homeownership occurred among people age 65 and older. This could be evidence of retirees, baby boomers who were ready to purchase a retirement home or perhaps even take advantage of a rapidly booming rental market for supplemental income.
Although economic factors have certainly contributed to the current state of the market, not all renters have eschewed the idea of homeownership because they could not afford to buy a home. Many people simply no longer recognize the benefits of owning a home. This is particularly true for millennials who are now turning away from the suburbs where their parents and grandparents once flocked in favor of live-work-play enclaves in downtown urban cores. While many people within this demographic could purchase a home, a large number simply rent by choice.
One of the reasons for this is that the largest segment of millennials is those between the ages of 22 and 24, according to the U.S. Census Bureau. As a result, this demographic is not yet at the point in life where they would typically be ready to buy a home.
A number of other factors are also contributing to a decline in the rate of homeownership among millennials. Among those factors is creditworthiness. Credit Karma reported that consumers between the ages of 18 and 34 have an average credit score of 624. Following the housing crisis, most conventional home loans now require buyers to have a credit score of at least 620. Even for consumers who have the minimum credit score, if they do not have a credit score above 720, there is still the reality of likely paying more in interest, which can result in higher mortgage payments.
For many millennials, there is also often a reluctance to take on more debt. This has proven to be especially true of young college graduates who are already facing a small mountain of student loan debt. With more and more consumers also paying credit card debt, it is little wonder that so many people between the ages of 18 and 34 are opting to rent or even move in with their parents rather than take on a large mortgage payment.
Along with being saddled with large student loan payments that make it difficult to save for a down payment, millions of people in their twenties and thirties who would normally be first-time homebuyers are putting off marriage and having children as they continue to struggle with finding decent jobs.
While the inability to purchase a home due to economic factors has certainly been bad news for those who have not been able to realize the dream of homeownership, the changing market has proven to be a boon for landlords. In particular, small landlords have found that the burgeoning rental market has presented an incredible economic opportunity. Over the last several years, there has been a tremendous increase not only in the number of rental properties, but also in the cost of renting.
Since 2004, the number of new rental households has increased by nearly 800,000 per year. Such rental demand has been so strong that it has actually proven to be a strain on the available rental supply. Rental vacancies are now scarcer than they have been in almost two decades. It all comes down to supply and demand. Because there simply is not an expanding rental supply to meet the growing demand, landlords are able to charge more for rent. As a result, rental prices are on the rise. In fact, rents are rising almost as fast as inflation.
Although builders have been working furiously toward adding new apartments to the national supply, most such builders are concentrating their efforts on the luxury end of the market. Consequently, renters in the middle and bottom of the market are feeling the pain.
Regardless of why more people are now renting, the fact that America has become a nation of renters cannot be denied. Furthermore, this trend is not likely to change for quite some time. As unfortunate as the situation may be for renters, landlords and those who have an eye toward investment will find that there has never been a better time to be in the business of rental properties.
Along with the ability to tap into rapidly rising rents, landlords are also able to take advantage of a number of tax benefits. At the same time, landlords will find that owning rental property presents the ideal opportunity to build a steady revenue stream that can be used for supplemental income or put toward a retirement account. Regardless of what a landlord's reasons may be for tapping into the continually increasing rental boom, owning rental property is not always sunshine and roses. It does require due diligence and a tremendous amount of effort to ensure a successful business enterprise.
Learning to minimize the challenges associated with owning rental property can help even small landlords leverage the full potential presented by the current market.
First, it is important for landlords to ensure they keep their expectations reasonable. The potential demonstrated by the current market is undeniable, but even so, landlords should recognize that it is not a get rich overnight scheme. By keeping one's expectations realistic, it is possible to achieve a goal of a positive cash flow without experiencing disappointment.
At the same time, it is important for landlords to strike a solid balance between revenue and effort. Not all landlords are the same. Some prefer to take a more hands-on approach while others opt to outsource to a property management firm. It is vital for landlords to determine the method they prefer and which best suits their lifestyle and management style.
Landlords should also make certain they have a solid grasp of the rules of the game. Demand may have shifted in favor of landlords, but tenants still have rights. Both federal and state laws specify landlord responsibilities and liabilities. When a problem arises, landlords cannot simply claim ignorance as an excuse.
As is the case with any other business, landlords should expect to face expenses. One of the best ways to avoid unexpected expenses is to take advantage of the opportunity to have a property inspected by a professional inspector prior to purchasing it.
Attending to legal matters is also vital. Landlords should always ensure that their leases are completely legal. If a mistake is made on a lease, it will be far more difficult to evict a tenant when he or she violates the terms of the lease.
It is also important for landlords to take the time to call references and run background and credit checks. This is a step that far too many landlords overlook in an effort to quickly fill vacancies, which can be risky and expensive. The good news is that there are tools available, including free tenant screening services that can make this process much easier and faster while giving landlords the peace of mind they need to protect their investments.
Networking with a trustworthy attorney, lending professional, and tax professional can also prove to be important for landlords, especially those who are new to the business. If there is a landlords’ association available nearby, property owners may also find it advantageous to join. This can be a great way to gain access to other professionals, including inspectors, contractors, and attorneys.
Landlords should also ensure they have the right type and sufficient amount of insurance to cover their liability needs. Property owners who may be unsure about their insurance needs could find it helpful to consult with an insurance professional.
Finally, while the profits from owning rental property can be lucrative in the current market, landlords should make a point of creating an emergency fund with money set aside to cover unexpected expenses that might not be covered by property insurance.
Investing in rental property can be a solid decision, particularly in light of the current booming market. The key is for landlords to ensure they are fully informed.