By Jacob Gaffney
July 20, 2011
Political deadlock mixed with terrible housing market conditions will eventually turn America into a society of renters, according to the latest Housing Market Insights report from Morgan Stanley (MS: 21.72 +3.53%).
High rates of mortgage delinquency, foreclosures and liquidations are turning homeowners into renters, analysts at the investment banking giant said, lowering homeownership rates and increasing demand for rentals.
And it appears even federal institutions are giving up on implicitly supporting what used to be the cornerstone of the ideal American life.
In the Treasury Department white paper on reforming the government-sponsored enterprises, a suggested change to housing policy was put forward: "The administration believes that we must continue to take the necessary steps to ensure that Americans have access to an adequate range of affordable housing options. This does not mean our goal is for all Americans to be homeowners."
During the housing bubble, homeownership rates increased from 66% to 69%, an all-time high. Today, that number is just below 65%, according to Morgan Stanley researchers Oliver Chang, James Egan and Vishwanath Tirupattur.
The analysts expect this will decline further to 59.7%, driving multifamily vacancies down and rents up. The researchers derived this estimate by taking the number of delinquent homeowners likely to be foreclosed, and moving them into the rental category.
Nonetheless, American payroll and household formation numbers are actually on the rise (see chart below):
Traditionally, this would mean that these households, with increasing capital, would naturally look to invest in a home, but getting the loan to do so is on a downward trajectory (see chart below):
The above two graphs will come as no surprise to those following the rental markets.
The National Multi Housing Council, a trade group representing the apartment industry, pushed for balanced housing policy in regard to renting at the group's mid-year conference in May.
During the housing boom, it was difficult to get approvals from the government-sponsored enterprises for rental housing, but localities are reducing the barriers and restrictions that have hampered rental development to encourage the revenue and jobs new development brings. The NMHC called the trend "the new normal," and it appears demand will continue to surge.
"The best public policies must recognize the need for diverse, affordable housing options for both renters and owners. However, home ownership remains one of the most important sources of wealth for many households," said Sarah Duda, senior research and project associate at the Woodstock Institute, a nonprofit research firm and financial reform advocate.
After reviewing the Morgan Stanley report, Duda responded: "Keeping current homeowners in their homes should be a top priority. Preserving the opportunity for people to purchase a home, particularly while affordability in the ownership market is high, is also important. Requiring meaningful loan modifications and making mortgage credit available, safe and affordable for renters who are ready and willing to buy their first home will be most helpful at this time."
Furthermore, a lack of credit and falling home prices continue to negatively impact the desire to own a home.
And it's not just these factors pulling down the ability of Americans to get a mortgage.
"GSE reform, Dodd-Frank securitization rules, mortgage interest deduction reform, continued home price declines and a long workout period for distressed homes, will likely make it harder to buy an owner-occupied home," the Morgan Stanley report states.
"As such, we believe that the U.S. will become a Rentership Society, in which the homeownership rate will keep falling, the home rentership rate will conversely rise, and the rental market will dominate the investment landscape in housing for years to come," according to the analysts.
They made clear the interpretation of their results are not necessarily equal to a negative outlook. They point to improvement to the multifamily sector as an example. However, performance of single-family dwellings, often owned by one landlord, are more difficult to project.