Sam Zell says homeownership will fall to 55%

11 Replies

Legendary real estate investor Sam Zell believes (or at least purports to believe) that homeownership will fall to 55%, well below the 64% it is at now and far from the ~69% we saw prior to the crash. Here is the article. Not saying I believe it or not, but it is a heck of a datapoint.

The U.S. homeownership rate may fall to as low as 55 percent because more Americans are choosing to rent as they postpone getting married and having children, said Sam Zell, chairman of landlord Equity Residential.

Demographic and lifestyle changes, more than economic factors, are driving down the ownership rate over the long term, Zell said yesterday at the Milken Institute Global Conference in Beverly Hills, California. As of 2010, about 54 percent of adults were married, down from 57 percent a decade earlier, according to the U.S. Census Bureau.

“The deferral of marriage has such a staggering impact on real estate and I just don’t think people focus on it,” said Zell, 72, whose Chicago-based Equity Residential is the largest U.S. apartment landlord. “I don’t think the multifamily market has ever had a better set of future demographics.”

The homeownership rate fell to the lowest in almost 19 years, declining to 64.8 percent in the first quarter from 65.2 percent in the previous three months, the Census Bureau said today. Recovering home prices and rising mortgage rates have put real estate out of reach for some would-be buyers. Homeownership peaked at 69.2 percent in 2004.

The median age of marriage rose to 28.2 for men and 26.1 for women in 2010, up 1.4 years for men and 1 year for women from a decade earlier, continuing a trend of later wedlock that dates back to 1950, Census Bureau data show.
Postponing Children

Zell also cited reports of a growing number of women freezing their eggs to postpone having children while they pursue their careers. That delay will further reduce demand for single-family homes, he said.

Equity Residential (EQR) owns or has investments in about 110,000 multifamily units. Of the 18,000 rental apartments the company has in New York, 45 percent are occupied by single people, Zell said.

“It’s happening all over the country,” he said.

I think his prediction may well be correct. Its always difficult to make predictions, especially about the future. But he's extrapolating some trends that are pretty strong.

As I've written many, many times a property you live in is an expensive doo-dad, same as car or boat. And as for many other expensive (and inexpensive) doo-dads, there are industries in place to convince people they should spend their limited income on these doo-dads. Housing has not only several powerful groups promoting "the American dream" of home ownership, but its also embedded deeply in government policies. But ultimate consumers make choices about where to spend their money. There are many places in this country where you can get more for your money by renting than you can by buying. And the price of entry for renting is dramatically less than for buying.

Buying a residence is also a form of economic handcuffs. There was a recent thread about someone who was being forced to relocate by their employer but was underwater on their house. For that person, a bad situation of the forced relocation is being made worse by owning a house. Even if they had to break a lease they would have been better off renting.

For younger folks just getting started on their careers, that's an important consideration. Once upon a time "starting your career" meant getting a job at the same factory your dad and granddad worked at. And you had some assurance you would work that job for 30 or 40 years. So putting down roots and buying a house with a 30 year mortgage meant you would live in a free and clear house down the road. Now life is much less assured. The exoribant costs associated with buying and especially selling houses mean that once you've bought a house you've just signed up for a big financial hit if you have to sell. So renting makes even more sense.

Jon Holdman, Flying Phoenix LLC

Jon, good point that this isn't a 10 year trend, it's a long term trend. Honestly, if you look at it from a socio-political/economic standpoint we're becoming a lot more like our friends across the pond in Europe. People getting married later, living at home longer, fertility rate is dropping, religious affiliation dropping, stubbornly high unemployment, the number of couples choosing to never have kids on the rise etc. Our economic policies are moving in that direction as well. Those trends show no signs of slowing though perhaps the recent downturn in the economy boosted them more than usual.

On the other hand I do think there is an inherent desire in many people to own their own home, perhaps instinctual. Time and time again I see people buying homes when it makes no sense for them. I know two couples who never plan to have kids who have bought homes, rather large ones at that. But I'd bet that apartments/condos/townhomes, especially closer in to city centers, will continue to see increased demand as childless couples with dogs become the new norm.

@Cal C. I don't know if the homeownership rate is going all the way to 55% but that is the trend. In addition to the factors Sam and @Jon Holdman mentioned there are two more that are having a significant impact.

I think an underreported issue is that the prime first time homeowner demographic are 'children of the housing collapse', who grew up watching their parents and friend's parents lose their homes or be stuck with negative equity. Like children of the Depression, the traumatic events of their youth will influence their attitudes and behavior for a long time. For many it will be a lifetime.

The second issue is the exploding levels of student debt and its effect on graduates ability to qualify for and afford a mortgage. As of last summer the amount of student debt outstanding was almost $1 Trillion (with a T!) and growing at a compound rate of almost 14% annually. That is more than is owed on credit cards or auto loans.

Have a look at these charts below. The first is from a Fed report updated a year ago. The report essentially concludes there's nothing to see here move along but the charts (starting on page 34) lay it all out. http://bit.ly/1kcqOUN

The second and third charts are from a Barclay's report out in 2012 that was reported on by Sober Look showing that while college graduates have an income advantage and could presumably buy a house more easily than non-graduates, the number of those who do is crashing. The final chart compares the credit scores for graduate and non-graduate potential first home buyers and shows that only those without student debt have rising ratings. http://bit.ly/1hOoExj

OK those charts are tiny so if you want to see them in a larger size shoot me a message with your email or check out the links.

Good hunting-

Click on the charts to see bigger versions.

Funny thing about college these days. A four year degree will get you the same job a high school diploma would have gotten you 10 (??) years ago. The timeline may be wrong, but the education requirement inflation for job seekers is not.

People have all sorts of desires for stuff. Housing, cars, nights out on the town, etc. I wonder if there is a factor that there are so many other opportunities to spend money that housing takes a back seat. That is, people just choose to spend money on other things.

I recently read "Happy Money". Its about what sort of spending actually creates happiness. Not just a "here's what we think", but actually backed up by studies. Guess what? "Stuff", including houses and especially big houses does not create happiness. Experiences trump stuff. Maybe younger folks have caught on and just aren't willing to be locked into a house at the expensie of giving up mobility.

Jon Holdman, Flying Phoenix LLC

@Giovanni Isaksen ,

Excellent point on the psychological aspect of the downturn. Funny, I grew up during the dotcom boom and as a 15 year old fixing computers for all my friends/family I was considered a wunderkind and always told I'd be a millionaire. There is little doubt in my mind the optimism of that time had a tremendous under-acknowledged effect on people coming of age then (myself included) and it would stand to reason that the same is true for those watching the market collapse around them while coming of age more recently. Same deal with the important point on student debt. Everything points to a future where we have more renters and when I size up investments I keep the trends we're discussing in my mind at all times.

It's sad to think about, I think young people are getting a crap deal, but there are definitely ways to angle an investment strategy to gain from the trends.




@Cal C. thanks for sharing this info. do you have a link to the website with this information? Great stuff to blast out to all your investors!

Originally posted by @Tyson Cross :
@Cal C. thanks for sharing this info. do you have a link to the website with this information? Great stuff to blast out to all your investors!

I got that from Bloomberg. Only place I saw it.

Originally posted by @Jon Holdman :
Click on the charts to see bigger versions.

Funny thing about college these days. A four year degree will get you the same job a high school diploma would have gotten you 10 (??) years ago. The timeline may be wrong, but the education requirement inflation for job seekers is not.

Yeah, a 4-year degree seems to almost be a requirement these days for a while collar job (if for no other reason than it culls through the stack of resumes).

Like entrepreneurship in general, you don't need any formal education for most of what BPers does in general. If you want to be an agent you need to take a few class, but far, far fewer than a Bachelor's. You may need some money to get start, which many use from their 9-5, but most of their RE knowledge comes from experience, books, and BP.

I have a BA but will probably never use it. I have skills I've obtained from it, but I'm not going to do anything with political science or history.

However, I think the US overdoes its higher education too much (at least on the lower levels). Some people ought to learn a trade instead of trying to attend overly-priced college. You'll make about the same amount of money, without all the debt.

I think he is right. Single parents also a growing trend that will rent more often than buy at a younger age.