The Mortgage Bankers Association has posted a Special Report: Diverted Homeowners, the Rental Crisis and Foregone Household Formation. The report’s bottom line is that people who should have been homeowners have displaced people who should have been renters. Those displaced people have been left in their original households, typically those headed by their parents.
The Report’s Executive Summary states that among the long term impacts of the Great Recession
have been the emergence of a rental housing shortage and an intensified affordability crisis in the rental market. In this report, we analyze various supply and demand factors that have led to this crisis.
In so doing, we provide detailed analysis of the shifts in homeowner and rental demand. As we note, these shifts cannot be analyzed without understanding the shifts in household formation that have occurred. We utilize data from the U.S. Census and focus the analysis on 3 distinct time periods (2000, 2006, 2012) to highlight housing epochs that are relatively normal, at the peak, and near the bottom of the market. Special attention is also placed on those younger than age 45 because they represent the households most commonly making first time decisions to form a household and to own a house.
Our primary findings:
• A sharp downturn in homeowner growth since 2006 suggests that 6.0 million would-be homeowners (the expected number compared to actual) have been shifted to renting or have left the housing market.
• These diverted homeowners triggered a cascade of adjustments throughout the rental housing sector that are measurable in different ways.
• A sizable portion (roughly a third) of the diverted homeowners likely have been absorbed into single-family rentals, especially among households aged 25 to 54.
• Although larger than expected, growth in the rental sector was too small to account for both the expected rental growth and also the large number of diverted homeowners. Before disruptions to the owner-occupied market, the rental sector had been expected to grow by 4.4 million occupied units after 2006, due to the arrival of the large Millennial generation. While diverted homeowners resulted in demand for nearly 6 million additional rental units, rental housing only grew by 5.2 million.
• New construction was crippled during the financial crisis and aftermath, slowing its response to the swelling rental demand, although multifamily construction volume nearly doubled in 2012 compared to 2010, and increased another third in 2014 compared to 2012.
• The clear inference is that slightly more than 5 million otherwise-expected renters left or never entered the housing market, their growth displaced by the diverted homeowners, and diminishing overall household growth far below expectations. (1)
• A further consequence of the resulting increase in demand and shortfall in supply in the rental market was an increase in rents, with rental affordability problems surging to record heights in 2010 and 2012. This dynamic created an increased incidence of high rental cost burdens that was remarkable for its relative uniformity across the nation.
There has been a fair amount written recently about household formation (here and here, for instance), but this Report is notable for its description of the cascading effect that the financial crisis has had on today’s housing market. We are around the fifty-year low for the homeownership rate. If that rate has hit bottom, perhaps the trends identified in the MBA report are about to reverse course.