More California households are renting from Les and Elaine

condosThere are 10% more households in California today than in 2000 (as of 2013, the most recently reported Census year). However, that increase has not been a steady upward march of owners and renters alike. 18% more households rent in California today than in 2000. In contrast, homeowners have grown in number by only 4%.

Prior to the 2008 recession, owner household formations outpaced new renter households significantly. During and after the recession, that pattern reversed. This remains true today as most potential new homeowners are held at bay by broader economic factors. Those factors are primarily slow wage growth, over-inflated home prices, and personal foreclosure experiences which delay entry into homeownership.

While household formations continue to rise at a steady clip, a significant trend in the types of these formations has taken shape since 2008. 18% more households rent today than in 2000. In contrast, homeowners have grown in number by only 4%.

During the Millennium Boom, homeowner formations increased more quickly than renters, due to the allure of easy financing and rising home values. However, the trend reversed by early 2006. Growth in renter households continues to eclipse growth of homeowner households today.

Roughly two-thirds of the rise in renter households can be attributed to more single family residential (SFR) renters, according to a report by Zillow.

The other one-third of the rise is due to tenants moving into multi-family units. Sensibly, the trend would be reversed in a normal housing market, with a greater share of new renters moving into multi-family units and a smaller share moving into SFR rentals. However, today’s trend is indicative of the mass of foreclosures in 2007-2013. Many SFRs lost to foreclosure were converted into rentals, directly or indirectly, for those same foreclosed-upon families.

On the other hand, recent college graduates or those moving out of the nest for the first time make up a significant portion of new renter households moving into multi-family units. This generation — Generation Y (GenY) — will spend more of their lives as tenants than did their parents’ generation.

Most Gen Y households are expected to put off homeownership until later in life, if not indefinitely. Currently, the homeownership rate for individuals aged 25-34 in California is 35%, down from 41% at the height of the Millennium Boom.

That’s because young adults were hit by the 2008 recession just as they were gaining a foothold in their careers. Now, it’s going on seven years, and we are finally seeing some normalcy in the employment market. However, Gen Y income has been stunted irreparably and their attitudes about ownership damaged by the Great Recession.

This means first-time homebuyers will save for down payments over a long time period. This process has not even begun for a significant portion of this demographic as they have yet to find steady employment at wage levels that permit savings. Further, with residential rents now rising faster than incomes, saving is difficult.

But if you look far enough, there is a bright spot on the horizon. Once Gen Y makes a solid showing in the improving jobs market and their savings accumulate sufficiently, Gen Y’s massive population bulge will give California’s low-tier to mid-tier housing market a big boost. These first-time homebuyers are expected to enter the housing market in force around 2019-2020. At the same time, Baby Boomers will be retiring and looking for replacement homes. All of this activity will result in The Great Confluence of homebuyers, increasing both home sales volume and prices as we head into the next decade.

In the meantime, use marketing materials that speak directly to renters in your area. Too often tenants simply assume they’re unable to qualify to borrow and buy. And even if they aren’t ready to buy for a few years, establishing a relationship now as an agent they can trust for solid advice is a good first step in becoming their buyer’s agent when they are ready.

DRE #00598428
Senior Director, Coldwell Banker New Homes Division
With over 200 condominium, townhome and loft projects successfully marketed

“Fewer properties for sale with such remarkably low interest rates make it a great time to sell but a more difficult time to buy”