Skip navigation

Putting the Interest Rate Myth to Rest

Conventional wisdom tells us that low interest rates and government incentives are driving homeownership rates up, and that those increases are bad news for apartments. Not so, according to analysis by the National Multi Housing Council. First, we find a weak connection between homeownership rates and interest rates. Second, we forecast that even if the rise in homeownership continued unabated for the rest of the decade, more than 100,000 new renter households are expected each year, thanks to demographic trends and population growth.

Our research mirrors the findings of a study by two University of Southern California professors: Interest rates play no discernable role in increasing homeownership rates in the short- or long-run. Housing affordability can worsen even with low interest rates if house prices are appreciating faster than household income, a situation that describes many current markets.

Many analysts believe the pressure on apartments from homeownership is moderating. As rising house prices make them less affordable, renting becomes a more competitive option. According to Harvard University's “2003 State of the Nation's Housing” report, if the recent run-up in housing prices makes homeownership too expensive, the number of new renters expected in the next decade could easily grow from 1 million to 5 or 6 million.

Homeownership Made Easy

The key factors driving recent homeownership increases are not interest rates and government incentives; they are structural changes in mortgage finance that make home loans easier to obtain and a weak stock market that makes single-family housing a favorable investment.

Going forward, a rebound in the stock market and tax laws exempting up to $500,000 in capital gains from the sale of a primary residence will make it easier for aging baby boomers to rid themselves of homeowner hassles, and choose their housing based on their lifestyle preferences and not their investment goals.

Expectations for the Next Decade

While mortgage banking changes and the investment climate drove homeownership rates up in the 1990s, the key factor driving housing demand in the next decade is demographics. Population growth — through natural population increase, continued high levels of immigration and increased life spans — will increase demand for owner- and renter-occupied housing.

Some demographic trends will clearly favor rental housing, especially the new wave of echo boomers and the shift toward single-person households. After declining for two decades, the population in the traditional renting years (ages 20 to 29) is expected to increase 11% by 2010. Eventually more than 80 million “echo boomers” (currently ages 8 to 27) will move into the housing market, most likely as renters first. And there is no “baby bust” expected behind this generation.

Then there are the changes in household composition under way. The households most likely to own — married couples with children — are declining in number and now account for less than one-quarter of all households. Meanwhile, two-thirds of all new households in the past decade were non-family households, which have the lowest homeownership rates. This demographic shift alone would cause the overall homeownership rate to drop by 70 basis points by 2010.

Immigration will create more new renters. Over 2 million legal immigrants have entered the U.S. since 2000. In fact, 50% of the expected population growth in the U.S. will be immigrants, and half of all immigrants are renters.

Notwithstanding the aging of the baby boomers — and the fact that older households are more likely to own — the age distribution of the population, immigration and the overall growth in the number of households will produce a sizable increase in apartment renters.

A Win-Win Scenario

What about the recent rash of election-year initiatives designed to raise the overall homeownership rate? Won't they take renters out of apartments? Even if they are successful and the rate increased three percentage points over the current decade — a possible, but unlikely, scenario — the number of apartment renters would still rise by almost 1 million.

Apartment firms are successfully competing with single-family houses by offering better locations, larger apartments, more user-friendly floor plans, cutting-edge technologies and new amenities and conveniences. Apartments now offer not just a housing alternative, but a lifestyle alternative that many young professionals and empty nesters find attractive.

Thanks to population growth, though, housing demand is not a zero-sum game. Homeownership's gains are not the apartment sector's losses. Quite simply, the rising tide will lift all boats — regardless of whether they are docked at a single-family or multifamily residence.

Mark Obrinsky is the vice president of research and chief economist for the National Multi Housing Council.

TAGS: News
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish