The interest rate on 30-year mortgages began to rise in late 2016, and as a result, California’s homeownership rate is bound to lose steam before it can fully recover to pre-recession levels. Fewer homeowners naturally translate to more renters.
A short history of homeownership in California
Historically, the state’s homeownership rate has always rested some 10 percentage points below the national average, which was 63.7% in Q4 2016. The local homeownership rate has continued to slide downward since the 2008 recession when it experienced a six percentage point decrease from its peak just two years prior in 2006.
In non-recession markets, the homeownership rate typically drops while the interest rate surges upward to cool an overheated economy as seen in homeownership rates from the early 1950s up until the early 80s.
The state’s homeownership rate showed an upward trend from the 70s before peaking in 2006.
Both homeownership and mortgage rates dropped after 2007 and after a bumpy recovery from the recession. The former has become mostly stable at about 54%.
Aside from more stringent lending practices to correct the effects of irresponsible lending during the Millennium Boom, the Federal Reserve also kept interest rates low by supplying lenders with money at virtually zero interest in order to encourage buyers.
However, as mentioned earlier, the 30-year mortgage rate began climbing in late 2016. Interest rates are projected to rise over the next 25 years or so, further inhibiting the homeownership rate.
Rental property as the new standard
In place of homeownership, potential buyers will turn to rental properties, most likely detached single-family residences acquired by investors through buy-to-let mortgages.
Renting is perceived to be less risky than traditional homeownership and perhaps the only viable alternative (with the exception of mobile homes) for families who either need to relocate or have lost their homes to foreclosure.
Many families are unable to secure purchase-assist mortgages that can help them buy new homes, while others have begun to view traditional homeownership and its financial requirements as a potentially combustible situation and are therefore hesitant to put themselves in the same position. Rental properties can fill the gap for many of these families.
Property investors and landlords can expect to see occupancy growth in the short-term due to rental activity by would-be homeowners turned tenants.
It will be a while before California homeownership levels hit rock bottom and it is estimated that there won’t be any measureable recovery from that bottom level until 2018 or later.
Contributing factors
Aside from climbing interest rates, the dearth of housing units in the state have partly contributed to increased rental activity.
Despite the demand for rental property, city councils are unlikely to approve the construction of high-density multifamily high rises or the additional rental units needed to keep rental fees stable.
And while the job market has recovered and job numbers have gone back to pre-recession levels in late 2014, the increase in the population of working-age individuals in the state means that more jobs need to be created.
Since the state saw a 10% population increase from 2007 to 2016, it will take California until 2019 to reach the same percentage of employed population in 2007.
Apart from these economic factors, the younger generation is also showing a strong inclination towards renting instead of homeownership.
For more information on rental properties in California, call Lambert Investments Inc. at (310) 453-9656 or send an email to info@lambertinc.com.
