"Ah, the American Dream: You work hard, get a good job, start a family, buy a house and then, when you’re done with that house, you buy a bigger one. You accumulate wealth in your home and then pass that wealth on to your children, who will be better off than you. That’s the American Dream, right?" - Chicago Tribune
When these words were written in the Chicago Tribune in 2017, they were dripping with sarcasm. Yes, home ownership had long been perceived in the United States as a stepping stone to the creation of wealth and security, not to mention stable communities ("A home is not a mere transient shelter, its essence lies in its permanence, in its quality of representing in all its details the personalities of the people who live in it," HL Mencken said in 1926). In 1934, President Franklin D. Roosevelt had created the Federal Housing Administration in order to increase the availability of 30-year fully amortizing mortgage loans. After the end of the Second World War, President Harry S. Truman championed the Veterans Administration Home Loan Guarantee Program; home ownership was now made easily affordable to the families of returning servicemen. Then, in 1995, President William J. Clinton announced the National Homeownership Strategy. Boost the rate of home ownership to 67.5% of the American public by 2000 (it had hovered under 50% until 1947, and then gradually increased to around 64% by 1994) and good things will surely follow:
"All of our country will reap enormous benefits if we achieve this goal. Home ownership encourages savings and investment. When a family buys a home, the ripple effect is enormous. It means new homeowner consumers. They need more durable goods, like washers and dryers, refrigerators and water heaters. And if more families could buy new homes or older homes, more hammers will be pounding, more saws will be buzzing. Homebuilders and home fixers will be put to work. When we boost the number of homeowners in our country, we strengthen our economy, create jobs, build up the middle class, and build better citizens."
Of course, cheap and ready credit was essential to the construction of for-sale housing and to a robust resale market, and meeting that need, relaxed underwriting practices and "low-doc" and "no-doc" loans blossomed in the 2001–06 credit boom. Good things typically come to an end, however, at least where US real estate trends are concerned. Here, the painful experience of the "sub-prime mortgage crisis" inevitably followed. As a result, many homeowners were over-extended, and when their properties were suddenly "underwater", they simply walked away from the obligation to re-pay their debts. Banks flooded the market with "real estate owned" properties. Owner-occupied residential real property had lost its lustre as a fool-proof vehicle for wealth creation.
Now, almost 10 years later, the housing markets are adapting to the new realities. For-sale housing has regained its relevance, at least in certain markets. In New York City alone, there are reportedly no fewer than 15 apartments currently being marketed for $50 million or more, and robust construction is occurring in many cities. Yet, the overall rate of home ownership, now 64.2%, does not compare to its prerecession high of 69.1%. Simply put, there are more renters than ever before. Acknowledging this demand, giant institutional investors, including Fortress Financial, Starwood and others, have launched entirely new business lines to acquire in volume single-family homes for (of all things) the purpose of operating them as rental properties. Who could possibly have imagined?
Legislative developments are accelerating the trend away from home ownership. For the first time since perhaps the Great Depression, federal tax policy is skewed to benefit rental housing instead of home ownership. The Tax Cuts and Jobs Act enacted in 2017 limits the deduction by individual US taxpayers of real property taxes and mortgage interest, tilting the "rent vs. own" conundrum to the benefit of the former. Landlords were major beneficiaries of this legislation in an even more direct manner, as new Internal Revenue Code Section 199A entitles taxpayers who receive income through certain pass-through entities (such as real estate limited partnerships and limited liability companies) to deduct 20% of the net income generated from those activities.
All of this provides additional tailwind for the lively growth which has typified the apartment sector over the past decade. Amongst investors, market rate multi-family properties continue to enjoy popularity as an asset class despite recent increased costs of borrowing, that is, as commercial mortgage rates, no longer constrained by federal monetary policy, have crept up. Rent growth continues—rents for professionally managed apartments rose 2.6% in the first quarter of 2018. Similarly, the market value of investment grade apartments, as measured by the National Council of Real Estate Investments Fiduciaries (NAREIF), rose 1.9% in 2018 Q1 over 2017 Q1.
Amenity-heavy, new, multifamily development, designed with millennial renters in mind (bike storage, pet-friendly, enhanced technology, smaller unit sizes with sizable communal areas), appeals to busy lifestyles, and even mature renters are enjoying the benefits of maintenance-free dwelling options.
Likewise, affordable multifamily housing continues to enjoy federal support as the 2017 legislation spared from the cutting block Section 42 low-income housing tax credits and the use of tax exempt private authority bonds.
Home ownership, long an American economic and cultural norm, is too deeply engrained to be at risk of disappearing. However, as much of the American public has lost confidence in home ownership as a wealth creator, housing, generally, is increasingly being viewed primarily as a form of shelter and, for many Americans, rental housing provides a perfectly comfortable roof above their heads.