“America’s housing market is becoming more European.”
The above sentence, or some derivation of it, has been uttered numerous times over the past few years. Those who make this assertion typically mean that America is moving from a housing market dominated by homeownership to one where renting is not only less stigmatized but often preferred. To support this theory, they cite the declining homeownership rates and the near-record–high apartment occupancy rates.
As the shocks from the housing-led recession continue to reverberate, it seems logical this contention must be true. However, the statement is false, not only because there is no single European housing market (the homeownership rate in Europe varies by country significantly), but also because there’s no serious retreat from homeownership in favor of renting in the United States.
Homeownership Rates Stabilizing
The first evidence usually proffered in support of the “European” fallacy is the declining homeownership rate the U.S. has experienced since the recession. Undoubtedly, homeownership rates in our country have declined. However, they’re not collapsing but merely returning to historical levels and stabilizing. To understand how this trend is impacting apartment demand, one must look specifically at homeownership rates for the prime rental cohort, 20- to 30-year-olds.
For 25- to 29-year-olds, homeownership has fallen back to levels from before the recent run-up. For those under 25, the rate hasn't even fallen that far, only back to historical levels.
In hindsight, it is blatantly obvious that the relatively rapid increase in homeownership was unsustainable. Thus, the post-recession data show not a serious retrenchment in homeownership rates but, rather, merely an unwinding of a temporary increase that was never durable and was predicated on legal changes, lax lending standards, and investor euphoria, just to name a few causes.
Moreover, if America were truly becoming more “European,” such a change would manifest itself in changing attitudes toward homeownership. However, this, also, isn’t occurring. Indeed, a recent survey conducted by the Federal Reserve Bank of New York in which homeowners and renters were polled about their attitudes concerning homeownership in the wake of the housing market implosion showed scant, if any, evidence of such an attitudinal change. The majority of the survey respondents—including the majority of renters—still favors homeownership and believes it’s a good investment.
Among respondents who are not homeowners but would like to be, the main impediment cited related to their ability to obtain a mortgage, due to problems with their credit rating, more stringent underwriting standards, and so on.
The Key to Demand: Demographics
All this begs the question: What’s really driving demand for apartments? Surely some people displaced from houses they once owned are now renting apartments, though many cite this as a temporary and not ideal situation. Many who were displaced have simply rented a house—in some cases, the very one they used to own.
Further, apartment occupancy rates in the past have been higher than current rates, so displaced homeowners aren’t really creating unprecedentedly high occupancy rates that would be evidence of a severe shift away from homeownership. Rather, the key to the increase in today’s demand is demographics. Generation Y—the current 20- to 30-year-olds—is millions of people larger than Generation X, the preceding generation and formerly the prime rental cohort. Millions of extra people in the prime rental cohort means millions more people who are predominantly renters, irrespective of changes in homeownership rates.
The surge in apartment demand due to demographic changes was delayed slightly by the worst recession since the Great Depression, which prevented many young people from renting apartments. However, even a middling recovery since in the labor market has been sufficient to drive demand upward.
The most common age in America is 22, followed by 23, and then 21. And the number of 20- to 30-year-olds won’t peak until 2018. That means millions of young people will continue to be renters until they reach their late 20s and early 30s, when most people purchase their first home.
In the meantime, the U.S. housing market should remain very much “non-European.”
Ryan Severino is senior economist and associate director of research at Reis, a commercial real estate research and analysis firm based in New York City. Reach him at email@example.com or on Twitter at @rseverino_reis.