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Owning a home with the proverbial white picket fence is the epitome of the 20th century American Dream. This long-held ideal carried over into this century as the number of homeowners initially soared. But 16 years after homeownership rates peaked, they are currently on par with late-1960s levels. Moreover, renters now outpace owners in many markets.
One might think it’s the end of the American Dream. Think again. For starters, despite the decline in homeownership, many Americans still strive to own their home. Further, rather than mourn one ideal, I prefer to probe the roots of this paradigm shift. What I’ve found is a definite upside in affordable housing for both active and passive real estate investors.
America Is Becoming A Renter Nation
In 2004, homeownership rates hit an all-time high of 69.2%, after which they declined for 12 years before leveling out in 2016. There has been a slight rise of late, but ample evidence suggests this modest upward trend does not portend a return to record territory. In fact, many signs point to a decided shift in favor of renting:
• Renting flexibility: Many people are making the deliberate and long-term choice to rent because they like the freedom and flexibility it gives them to change jobs or relocate to a new city whenever it suits them. The days of spending an entire career at the same firm or in the same city are long past.
• Great Recession impact: Millennials, many of whom were in their formative years during the housing crisis, were scarred by watching their parents, neighbors or even strangers on the news lose their homes. These lingering effects and fear about the next recession dampen millennial homeownership desire.
• Retiring baby boomers: More boomers are eschewing the burden of homeownership in their golden years. By renting, they no longer deal with home maintenance or repairs, freeing up their well-earned time and money. In fact, this demographic represents the biggest growth in the renter population.
• Single-family home rentals: Today, renters aren’t limited to apartment living. Those who want to live in single-family homes, without the mortgage and maintenance burden, can find rental homes in nice neighborhoods near good schools and other amenities.
There are also a few other factors at work:
• Limited inventory: The supply of homes for sale is declining. Builders burnt by too much inventory during the Great Recession are cautious and focused on higher-end home construction.
• Home price and wage disparity: As prices grow faster than wages, aspiring homeowners struggle to qualify for mortgages or afford monthly payments.
• Growing debt: People saddled with credit card or student loan debt are often unable to save for a down payment or meet mortgage debt-to-income requirements.
• Rent affordability: Rents are also rising faster than income, further exacerbating the inability to save or qualify for a mortgage.
Beneficiaries Of This Renter Nation
Who benefits as financial and lifestyle freedom start to overshadow homeownership as the key to the American Dream? Clearly, landlords do and will continue to experience greater demand for rentals, especially for housing that people can afford. Additionally, real estate investors will have even more options at their disposal, with the potential for higher returns.
Three Ways To Capitalize On This Shift
Those who want to reap the benefits of America’s shift toward a renter nation, without buying and selling or renting their own properties, have several very good passive investment options. (Full disclosure: My companies are among the providers of these options.)
• Multifamily asset funds: Since the Great Recession, multifamily properties and funds invested in them have yielded high returns, especially funds focused on workforce housing, where current supply is limited and new construction is virtually non-existent. As more of America shifts toward renting, by necessity or choice, demand for such properties grows hotter, despite the good economy. When the next downturn occurs, demand for workforce housing will increase even further as homeowners and luxury renters are forced to find more affordable rental units.
• Real estate lending funds: Passive real estate investors can also put their money in lending funds that provide seasoned real estate pros with capital to buy and renovate distressed properties. Certain lending funds facilitate limited-period fix-and-flip transactions through short-term bridge loans. These provide fund investors with liquidity and above-average yields in a stable investment. There are also longer-term lending funds that provide active real estate investors with the capital to buy, renovate and then maintain properties to rent out. These longer-term funds are less liquid and have different risk factors to consider, including long-term interest rates and home prices.
• Hybrid real estate funds: A new type of evergreen fund has recently emerged that combines multifamily asset and lending funds into one hybrid fund. This positions investors for rewards, including short-term liquidity, monthly distributions and stability of the lending side, along with the higher returns and depreciation tax advantages of the equity side for an overall high-reward/low-risk investment.
Before either institutional or individual investors entrust their money into these or any other funds, they should conduct appropriate due diligence on fund managers. Investigate their past performance, management philosophy and corporate principles. If their goals and values don’t match your own, keep searching.
Homeownership Decline Is Not The End Of The American Dream
In 1931, James Truslow Adams coined the phrase “the American Dream” to describe the idea that anyone, regardless of the circumstances of their birth, could reach their highest potential. Today, some continue to strive for the traditional homeownership version, but a growing contingent is choosing lifestyle and financial freedom.
Real estate investors who probe and understand these truths significantly improve their ability to achieve and enjoy their own version of the American Dream.