Major Paradigm Shift Could Be At Hand: Rent vs. Buy

5 charts (3 of which are courtesy of Zero Hedge) go a long way towards illustrating the homeownership situation and the current buy vs. rent decision in the United States:

 

Homeownership_2

Since 2005, when the housing bubble began to pop, the rate of homeownership in the U.S. has been in a steady decline. On the other hand disillusioned former homeowners quickly became renters and pushed the rental vacancy rate down at a very similar rate to which homeownership fell:

Rental_Vacancy_Rate

Notice how the rental vacancy rate began a precipitous decline just as the 2008/2009 recession came to an end. Much of these declines in homeownership, and rental vacancies, have to do with the 2008/2009 Global Financial Crisis; damaged credit scores due to foreclosures and bankruptcies forced people out of their homes and into rentals. However, it is now seven years since the end of the financial crisis and “negative information” on people’s credit history is now beginning to roll off. Moreover, the economic recovery has seen a large decline in the unemployment rate and a steady improvement in labor conditions including average hourly earnings.

 

Meanwhile, what could be described as a “rental bubble” (largely due to people who could no longer own real estate being forced to rent and an entire generation who became disillusioned with homeownership following the popping of the housing bubble) appears set to come back down to earth:

Rent_Inflation_2

After decades of steady 2%-3% increases in median rents, rent inflation has exploded in the last couple of years.

Median asking rents have risen ~50% since 2006 while median home prices still remain below 2006 levels:

Median_Rent_2

Home_Price_Index

While a buy vs. rent decision almost always comes down to very specific factors which are individual to the buyer/renter and the location, from a big picture perspective it looks like a major paradigm shift could be at hand. The relative value shift that has occurred during the last ten years combined with record low mortgage rates have made buying a home a compelling proposition once again.

Co-authored with Maggie Sadowska of Mega Luxe Homes

 

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