Another Potential Cultural Shift

The U.S. Census Bureau recently announced that a greater percentage of Americans are renting than at any time in the last 50 years.  According to the Bureau, in 2016 36.6 percent of the heads of households rented their place of residence — the most since 1965.  43.3 million heads of household are renters, and the percentage of renters among heads of household has increased from 31.2 percent in 2006 to 36.6 percent.

120301_24b_forrent-crop-rectangle3-largeWhy are we seeing these shifts?  The authors of the Census Bureau study attribute the movement toward renting to lingering concerns about owning a home stemming from the Great Recession, rising house prices, and young people who are so burdened by student loan debt that they simply can’t afford to purchase a home.  Millennials are the most likely to rent their place of residence:  in 2016, 65 percent of heads of household under age 35 are renters.  And there may be other factors at play, like the potential difficulties of selling a home in an economy where you might need to pick up stakes and move to another city in order to advance in your career.  Who wants to be saddled with a house, and fretting about whether you can sell it, under those circumstances?

I’ve got no doubt that these factors, and others, are contributing to the movement toward renting.  In my experience, young people these days are a lot more thoughtful and analytical about their housing decisions than was the case with people of my generation.  We were raised on concepts of the American Dream in which owning your own home was a fundamental part of the puzzle, and as a result the decision to buy a house was almost a reflexive, automatic act.  Now it seems that people generally, and young people specifically, are more carefully weighing their options and concluding that, for many, renting makes a lot more sense — whether it is because of a desire to be flexible, or because renting often allows them to live closer to their workplaces and areas that offer lots of social activities, or because living in an apartment building can provide a kind of ready-built community, or because of concerns about getting stuck with an overpriced house, or something else.  It’s one of the reasons why, in Columbus, the rental market is exceptionally hot and people are building new rental units left and right.

We may be seeing a shift in cultural norms, away from defining success as owning a tidy home in the suburbs and mowing your lawn every Saturday during the summer.  If, like me, you’re not a fan of suburban sprawl and would like to see our existing city areas revitalized, the movement toward renting is not a bad thing.

 

Pumping Up A New Housing Bubble

The Washington Post carried a story a few days ago with a surprising headline:  “Obama administration pushes banks to make home loans to people with weaker credit.”

Wait, what is this — 1997?

housing-bubbleThe story details the Obama Administration’s concern that while the housing market is getting stronger, not everyone is benefiting.  That’s because banks are leery about making home loans to new borrowers and people whose credit scores are iffy.  As a result, the Administration is trying to encourage banks to make more loans using programs funded by taxpayers that insure banks against loan defaults, including programs of the Federal Housing Administration.  The Obama Administration wants lenders to use more “subjective judgment” in making loans and wants to make it easier for homeowners whose houses are underwater to refinance their loans.

The article further notes that, since the Great Recession hit in 2008, the government has been insuring between 80 and 90 percent of new home loans.  One of the principal federal agencies involved is the FHA, which allows borrowers with credit scores as low at 500 or down payments as little as 3.5 percent to get home loans.  Banks aren’t going down to that low end of the scale, however.  The average credit score on FHA loans now is 700, because banks are worried that if their loan portfolios are hit with defaults they’ll be held responsible — so they’re playing it safe.  From 2007 to 2012, banks rejected loans for 90 percent of applicants with scores between 680 and 620.

It’s amazing that, so soon after an economy-shaking recession that was largely caused by a massive housing bubble and ridiculous lending practices, regulators would be urging banks to loosen up their loan portfolios, make “subjective” decisions, and rely on the good ol’ taxpayer to insure them against risky lending practices.  It appears that banks have tried to learn their lesson and not repeat the practices that made The Big Short such a wild romp.  Don’t we want banks to be prudent?  And why should the federal government be insuring such a large percentage of new home loans, anyway?  If so many loans are being made to people with strong credit scores and meaningful down payments, why should taxpayers be standing behind 80 to 90 percent of those loans?  Don’t we want banks to make their own credit decisions and take their own risks?

Oh, and one other thing:  the article talks about how owning a home helps build a family’s wealth, and notes that without looser loan standards many young people will be forced to rent rather than buy.  This seems like ’90s-era thinking to me.  The reality now is that many young people don’t want to be tied down to an immobile asset that consumes a huge chunk of their monthly paycheck and won’t be paid off for 30 years.  They like renting because it gives them flexibility and the chance to pursue those good-paying jobs that are so hard to come by and might just be in another city or another state.  With some people saying the economy is teetering on the brink of another recession, can you blame them?

Considering The Rental Option In A Crappy Housing Market

I hate to be the bearer of bad tidings, but the housing market still sucks.  Yesterday a widely followed index stated that housing prices in 20 major U.S. cities declined for the fourth month in a row.  Prices also declined from last year’s prices, which were inflated by a government tax credit program that has since expired.  Even more depressing, in nine of the 20 cities the housing price index hit a new bottom.

The bursting of the housing bubble was one of the things that pushed the American economy into recession, and housing looks like it might keep the economy mired in recession a bit longer.  The lack of a quick rebound in the housing market is frightening for American homeowners.  Most of us have a lot of our net worth tied up in our houses, and if the market continues to decline it is going to have a long-term impact on our lifestyles and, eventually, our retirements.  Even in our New Albany neighborhood we’ve seen a nearby house with a foreclosure sign in the front window, and the housing market clearly is soft.  Many of the homes that have been on the market for months haven’t even gotten showings, much less offers or sales.

I’ve mentioned to Richard and Russell that they might want to focus on renting rather than home ownership, at least in the short term.  Especially in today’s economy, you need flexibility to follow job opportunities.  Renting permits that, home ownership really doesn’t.  Renters have landlords who (theoretically, at least) take care of problems, keep up the grounds, and screen your neighbors.  To be sure, renters don’t build up equity in property — but in this economy, even homeowners aren’t doing that.  Renters also avoid tying up a good chunk of money in an asset that may not appreciate in value.

For young people, renting rather than moving directly into home ownership makes a lot of sense.  It may not be “the American dream,” but it is a prudent response to what may well be an unfortunate long-term economic reality.