Oregon Office of Economic Analysis

A year ago our office asked “Is 2015 Peak Renter?” We laid out a straightforward case examining the three main underlying drivers for the shift into rentership over the past decade: household finances, demographics, and preferences and tastes. We know the pendulum has swung all the way toward rentership. The question is not whether or not it will swing back toward ownership, it will. The question is when will this happen. Our office’s position was that it would happen probably sooner than the conventional wisdom suggested. The reason was household finances and demographics are now working in favor of ownership.

Overall that piece got a lot of attention. Bill McBride of Calculated Risk even talked about it on one of his Bloomberg TV appearances (thanks Bill!). I also think it is fair to say that our work was greeted with a healthy amount of skepticism as it does when we discuss it in our presentations.

Well, the 2015 ACS data was just released and we got an update on the question of ownership vs rentership. As Jed Kolko notes in his great summary of the ACS data, rentership ticked up 0.1 percentage points nationwide last year. So not yet peak renter across the entire U.S. and the HVC data differ from the ACS data as well. That said, the U.S. changes were minimal, suggesting the shift into rentership has slowed considerably; possibly an indication that peak renter is near.

Locally, however, peak renter is already here. Statewide the homeownership rate ticked up from 60.7% in 2014 to 61.1% in 2015. In the Portland metro region the increase was even bigger at 1.6 percentage points.

Yes, it is just one year. One data point does not make a trend. It is possible that some of this increase will be given back in the 2016 data. However decomposing the ownership gains by age reveals an interesting pattern. This is what peak renter looks like in real life (IRL). The 20- and 30-somethings are seeing the largest ownership increases. The vast majority of these households rent (~80% renter in early 20s, dropping to 50/50 in mid-30s) but on the margin ownership is coming back somewhat.

Now, how pervasive are these gains across the nation? Is this just an anomaly or can we chalk it up to noisy data? In short, no or at least probably not. Looking at the nation’s 100 largest MSAs — the same 100 that we studied in the Housing Trilemma — shows that half of them saw their ownership rate increase in 2015. This is considerably more than the 20 or so that saw yearly gains during the Great Recession and its aftermath. Those 20 are probably more about noisy data than any real return toward ownership.

When decomposing ownership gains by broad age group, the largest metros show a similar pattern in that more are seeing increases among the younger cohorts. Some of this is due to composition effects where household formation among the young is suppressed as more are living at home. This influences the potential young renter households more.

However, the issue is not the magnitude of the changes but the direction.  As we argued last year, two of the three main reasons for the increase in rentership — household finances and demographics — are swinging back in favor of ownership in recent years. And expected to continue to do so. The third main reason — preferences and tastes — remains more of an open question.

As for the outlook, our office expects ownership to continue to increase somewhat in the coming decade. Just how far is uncertain. We are not likely headed back to 2007 ownership rates, nor should we. The large transaction costs associated with buying a home and the lack of flexibility is not for everyone or for every household. However the pendulum had swung all the way in the other direction in the past decade. More balance is likely to be seen moving forward.

It is also worth noting that in growing metropolitan areas like Portland, the overall number of renters and owners will both increase. There will be more of everybody. The challenge is ensuring the housing supply keeps pace with demand, which has not happened in recent years. Affordability has eroded considerably as a result.