Homeownerhsip: We haven’t seen such lows in 51 years

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Household formations are accelerating. Unfortunately, while the U.S. added more than a million new households over the last year, many of those were renters.

The U.S. homeownership rate has plunged to a 51-year low of 62.9% from 63.5% in the second quarter of 2016, a reflection of lingering concerns over the housing collapse, home prices that have grown at a faster pace than inflation, and personal financial hurdles that have led to more Americans renting rather than buying homes.

The last time the rate was this low, President Johnson was in office.

The downward trend is even more pronounced among millennials – those aged 18 to 34 – many of whom are being hit by higher rents and student debt issues, forcing them to move back in with their parents for the time being. Homeownership rates among the millennial generation slipped to 34.1%.

From my understanding, the number of renter households that are paying more than 30% of their income on housing hit a record high of 21.3 million. More than 11.4 million are reportedly facing severe housing cost burdens, as rental rates increase.

Despite low mortgage rates, many Americans still feel priced out, opting to rent. Realizing that, foreign investors, investment groups, and other private investors have been flooding the market with cash to buy properties they can convert into rentals.

For example, in the first six months of 2016, foreign investors bought more than $5.1 billion worth of apartment properties. That’s a 7.1% share of the total $72.3 billion in rental property investments in the first six months. Typically, international investors look to put their money in Class-A, trophy assets in gateway cities.

However, recent numbers tell a different story.

International investors poured $3.3 billion into U.S. apartment properties into non-major cities in the first half of the year. That’s about twice the amount they spent in major cities.

It’s all great news for property owners, but not so much for the folks that rent. As median rents climb faster than the pace of income and inflation, groups like Blackstone Group and Starwood Waypoint Residential are making great money.

As we noted last month, the trend has only begun.

Renting is becoming the ‘new normal,’ notes the Urban Institute, which just revealed that homeownership in the U.S. will continue to decline for the next 15 years.  “The reason is simple,” they note.  “In the millions of new households forming over the next 15 years, new renters will outnumber new homeowners – causing a sustained surge of rental housing demand that will significantly affect millennials, seniors, and minorities.”

An important fact to understand is that the majority (59%) of 22 million new households that will form between 2010 and 2030 will rent.  Just 41% will buy homes, as noted by the Urban Institute.  Perhaps this is why rents have been increasing as they have.

The annual rise in rental income just approached 4%, nearly four times the rate of inflation.

As I’ve said in prior blog posts, if you’re an investor looking for sustainable near-term growth, pay close attention to rental units.  They’re filling up quite fast and showing no real signs of slowing in the immediate future, creating a great opportunity for rental property owners and investors looking for high-yield returns.