Despite Drop in Home Ownership, an Increase in Renters*

Millennials cause homeownership rate to drop to lowest level since 1965:

The drop in homeownership is largely due to a delay in homebuying by the millennials, who have the lowest ownership rate of their age group in history. Millennials are not only burdened by student loan debt, but they have also delayed life choices like marriage and parenthood, which are the primary drivers of homeownership.

Why have today’s young people, as compared to young people in the recent past, delayed buying property, marrying and having children?

“While the millennial homeownership rate continues to decline, it’s important to note that the decrease could be just as likely due to new renter household formation as it is their ability to buy homes,” wrote Ralph McLaughlin, chief economist at Trulia. “Certainly low inventory and affordability isn’t helping their efforts to own, but moving out of their parents’ basement and into a rental unit is also a good sign for the housing market.”

Why are many of today’s young families choosing to rent rather than buy their homes?

The rental market is strong across the nation, which has meant a sharp rise in rents; that, in turn, keeps many young renters from being able to save for a downpayment on a home…

More of the same. However:

…It is also more difficult to qualify for a mortgage today than it was during the last housing boom. Home prices have been rising at a far-faster clip than wage growth or employment growth. In addition, the supply of entry-level homes for sale continues to drop. Add it all up, and young buyers are continuing to rent longer.

Ah, the beginning of an acknowledgement of what’s really going on.

“Broadly speaking, the falling homeownership rate is a sign that renting isn’t only for those just starting out or making a transition, but is becoming an increasingly viable longer-term option for many households,” noted Svenja Gudell, chief economist at Zillow. “It also means incomes are not yet rising quickly enough to broadly support new homeownership, and that inventory remains too tight to allow for meaningful access to affordable housing.”

Yes. Housing costs, especially the upfront costs of home buying, have outstripped income growth. Developers have focused on higher-end properties. Many prospective first-time and lower-income buyers, typically young people, cannot afford to buy. Non-buyers have bid up rents.


-Economic recovery continues more slowly than it should, due to high levels of taxation and govt regulation (another form of taxation).

-ZIRP has contributed to a runup in residential property prices.

-Young people’s incomes have not kept up with housing prices. This is due in part to long-term structural changes in the economy, and of course there are winners as well as losers, but it’s also a function of increased govt involvement in the economy that has suppressed some of the animal spirits that might otherwise create more and higher-paying jobs and business opportunities for young people.

-Mortgages are harder to get for marginal borrowers including many first-time home buyers, as banks face increased regulation, reduced competition (a consequence of increased regulation — who knew?) and the option to make easy money by investing customer deposits in low-risk govt bonds as opposed to lending them out.

-Overall the rich get richer, not because of any insidious effects of free enterprise, but because the modern, overregulated, increasingly cartelized and corrupt US economy reduces opportunities for people who lack capital and connections.
Or maybe those darn Millennials and their preference for renting have reduced the rate of home ownership.
* In case it’s not obvious, the post title is an allusion to this often-cited NYT article that confused causes and effects.

8 thoughts on “Despite Drop in Home Ownership, an Increase in Renters*”

  1. “but because the modern, overregulated, increasingly cartelized and corrupt US economy reduces opportunities for people who lack capital”

    As stated, this comment infers that there is an inherent nature to the US economy, that it is corrupt. It is more accurate to say it has been corrupted by those influences mentioned.

  2. If government subsidies to mortgage loan repayments were scrapped, would house prices fall far enough to let millennials join the fun?

    Plus, presumably, scrapping zoning regulations would help them.

  3. Scrapping the Mortgage interest deduction will never happen, unfortunately.

    But if scrapped, it would be one of the most far reaching policy changes in my lifetime. Imagine the ripple effects. Yes Dearieme, I suspect housing would be more affordable. But newly constructed houses would, I suspect, be smaller as the sales prices should be lower. That would negatively impact commodity producers, general contractors and construction labor markets. (And in America newly built houses have gotten huge, with vaulted ceilings, 3 car garages and massive kitchens becoming the norm.)
    Then then potential negative impact on charities if congress doesn’t restructure the itemized deduction limit. A preponderance of families that Itemize deductions on their 1040’s can only because they pay mortgage interest. They piggy back their charitable deductions on top of that. If they get no deduction for charitable contributions how much will churches and charities suffer?

    Nonetheless, it needs to be scrapped. The economic distortions have become too great. Which is why it won’t be. In 1996 Steve Forbes proposed scrapping it with his flat tax plan, and it killed his presidential campaign.

  4. The equivalent in Britain was scrapped, the initial cut being made by a Conservative government, the final by a Labour government. Our house prices are mad; without the abolition of mortgage interest relief they would presumably be demented.

    We still get exemption from Capital Gains Tax on our “principal private residence”. I imagine that that will stay in place until some huge financial crisis occurs.

  5. There is another underlying force that is not widely reported. HHS/HUD control a lot of federal cash for cities and towns. The push under Obama has been to favor rentals at the expense of freestanding houses. This is intended to promote “diversity”. Often building high end rentals is the quid pro quo for allowing smaller lot freestanding houses. I don’t understand all the details but the net impact has been to promote lots of high end rentals which have monthly charges comparable to existing single family homes. It may be that student loans are making it difficult to get mortgages but it is not the sole cause.

  6. “But newly constructed houses would, I suspect, be smaller as the sales prices should be lower. ”

    Houses have gotten much larger and the land costs are a big part of the price rise. We are visiting Jill’s son in Oregon where they live in a rural area.

    Tremendous difference from California although Portland is just as crazy as Los Angeles.

  7. Property taxes are a factor in affordability as well. Single family homes have a larger component of land value for a given square footage. As Mike noted, land values are rising faster than construction costs in many urban areas. It is possible to have a nicer family home in an apartment community with high end community amenities than with a single family home. Given how many parents are both working and how much their kids are in organized out of home activities, the need for a yard is much less than in times past. Have a lease is also beneficial if frequent moves are the norm.

    Another wedge that government is driving into home prices is infrastructure mandates for green space set asides, underground utilities, parks, bike and running paths, etc. These developer mandated design rule costs are passed on to the buyers. The less expensive the housing unit, the more these costs impact the house cost. This makes entry level houses disproportionately more expensive for what you get compared to an apartment.

    I’ve noticed another technique being used by cities to pass on public utility and service capital costs to the initial home buyer. These are called impact fees which are intended to pay incremental infrastructure costs for new developments such for utilities, sewage, surface water drainage, public service facilities (such as for fire and police). In our former city, these are incorporated as a $6000 building permit (up from $500 15 or so years ago) and new additional impact fee of $6000 per residence. The fee structure for multi-family structures is much lower, but I am not well informed on them and there might be economic incentives for large projects where these are highly negotiable. The net effect is to raise the cost of entry level home ownership by almost $12000 compared to 15-20 years ago based solely on government shifting these costs to home owners. I’m going to make a wild guess that they are realizing a net revenue compared to actual capital costs with the balance funding other things, even into general revenue.


  8. “…. of their age group in history.”

    Wow! History begins in 1965. Who knew?

    I guess the young earth creationists really are wrong.

    The Earth isn’t 5000+ years old. It is only 51 years old.

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