There was an article in the Wall Street Journal last week discussing a Freddie Mac survey that demonstrates that an increasing number of folks prefer renting to buying which has some serious implications. First, we know that home ownership rates have been edging down for a number of reasons, such as: (1) delayed age of marriage, (2) smaller families, (3) slow household formation, (4) very slow population growth, (5) lifestyle preferences, i.e., staying urban, (6) concentration of businesses to urban centers vs. suburbs, and (7) high student loan debt, to name the major ones.
The survey shows that with a boom in multifamily housing, rents have stabilized while homes have risen such that 76 percent of respondents say renting is cheaper. Older folks especially prefer the “convenience and flexibility” of renting and avoidance of maintenance costs. Just a year ago, 65 percent said renting was cheaper. Interestingly, 82 percent of baby boomers say renting is cheaper, up 11 percent year over year. Overall, 17.6 percent said they didn’t have enough for a down payment, but that falls to 8.8 percent for those aged 55-64 and 4.8 percent for the 65+ cohorts.
Why is this relevant? Look at the chart below. It shows Homeownership Rate by Age. You’ll note that the older cohorts have the highest rate of ownership. But if they plan to sell to downsize in retirement or, per the survey, opt for rentals, who’s going to buy? Note that the bulk of the net worth of homeowners is in their house; $185k of equity vs. $231k over median net worth, or 81 percent. The point is that older folks have most of their fortune in their homes, they increasingly plan to rent instead, but who will be there to buy their homes? The implication is that single family homes of older people won’t be appreciating and, if a lot go on the market, then new construction might suffer. Particularly chilling when put in the context of the U.S. population growing by a scant 0.7 percent.
David Ader is Chief Macro Strategist for Informa Financial Intelligence.