In the run up to the 2008 US mortgage crash, which ultimately led to a worldwide recession, we saw a significant shift from rental to homeownership in the US. Many expected this trend to continue but recent US homeownership figures suggest otherwise. Homeownership levels are now back down to levels last seen in the 1960s and many believe the move to rental accommodation will continue. However, the makeup of the market is changing and we know that millennials are the new driving force behind the US housing market. So, why are we seeing a switch back to rental accommodation?
Millennials struggling to raise funds
A tightening of US mortgage regulations in light of the 2008 crash have made it more difficult for first-time buyers to raise sufficient funds to acquire their dream home. We have also seen suggestions that the “bank of mum and dad” is starting to dry up as the squeeze continues. As a consequence, already stretched affordability rates continue to move against first-time buyers. We also know that more millennials are now living with their parents for longer as they look to raise funds for a deposit.
Mobile employment market
For many years we have heard rumours of a “mobile employment market” but there are signs it is arriving in the US. The US employment market is extremely strong, economic strength has prompted a strategy of interest rate rises by the Fed leading to many millennials unsure where their long-term future lies. If more people are flexible regarding short-term employment contracts in various areas of the US then putting down roots will always be an issue.
Wage inflation
Even though the US economy is booming, with the Fed looking to blunt short to medium term strength with interest rate rises, wage inflation is not yet following suit. Historic economic cycles show that wage inflation tends to lag behind economic performance. As a consequence, it is highly likely we will see strong wage inflation in the short term even if the US economy starts to slow down a little. At the moment it is difficult to balance the figures when looking to acquire a property, but, as wage inflation continues to rise, this may help many with border line affordability issues.
Prices pushed higher by private rental investors
It is rather unfortunate that many potential first-time buyers are within reaching distance of their dream home but the affordability factor is not there yet. As many are forced to switch to private rental accommodation in the meantime, this encourages private rental investors to acquire assets. This then increases competition in the real estate market and pushes prices higher – extending affordability issues for many millennials.
Student loans
Official figures suggest that total US student loans now top $1 trillion with the majority of millennials owing in excess of $10,000. This is obvious something to take into consideration when applying for mortgage finance. As many struggle to find a work/life balance, perhaps the last thing on their mind is yet more debt to pursue the US homeownership dream?
US homeownership
Historically the US has been a rental market although just prior to the 2008 US mortgage sector collapse there were more homeowners than renters. The situation has deteriorated somewhat since the ensuing recession and home ownership numbers in the US are now down to levels last seen in the 1960s. While wage inflation will continue to rise, even when the economy begins to slow as a consequence of interest rate rises, this may not be enough for many millennials to buy that dream home. Interesting times ahead for the US property market, maybe private rental investors are gaining the upper hand? Maybe US homeownership rates will improve once wage inflation kicks in? Time will tell….