Homeownership rates gave a mixed performance across the state in 2016. Riverside continued to have the highest rate of homeownership, at 63%. Los Angeles County remains the lowest at just 47%. Statewide, the average homeownership rate fell slightly to under 54%.

California’s homeownership rate will likely continue slip in 2017. After this it will level off before finally increasing around 2020 as members of Generation Y become first-time homebuyers.

The average rental vacancy rate declined to 3.6% in 2016, well below historic norms. Rental vacancies decline when access to home financing is tight, zoning is too restrictive or displaced homeowners are not willing or able to buy again. The highest rental vacancy rate in 2016 was 5.8% in Sacramento. The lowest was 2.9% in both Los Angeles and San Diego.

Rental vacancies will continue to linger below historic norms until homeownership rates stabilize and builders begin to adjust, expected around 2018 statewide. Meanwhile, rents will continue to rise beyond the rate of inflation. Multi-family construction will then increase, as it did in the 1980s, exerting downward pressure on rents.

Post updated March 7, 2017. Original copy posted January, 2013.

Chart 1

Chart updated 03/07/17

Chart 2

Chart updated 03/07/17

2016 home- ownership rate
2006 home- ownership rate
2000 home- ownership rate
California
53.8%
59.3%
57.7%
Los Angeles
47.2%
53.4%
49.6%
Riverside / San Bernardino
63.0%
67.9%
62.5%
Sacramento
60.6%
63.3%
64%
San Diego
53.3%
60.4%
61.6%
San Francisco
55.8%
59.4%
48.9%

Chart 3

Chart updated 03/07/17

2016 rental vacancy rate
2006 rental vacancy rate
2000 rental vacancy rate
California
3.6%
5.8%
4.5%
Los Angeles
2.9%
4.2%
4.9%
Riverside
5.6%
7.9%
7.8%
Sacramento
5.8%
10.6%
5.9%
San Diego
2.9%
6.8%
4.1%
San Francisco
3.6%
7.5%
3.2%

Are rentals the future of California real estate? As homeownership and rental vacancy rates decline in counties across the state, a change in the housing market is on the horizon. The future will be determined by jobs, construction and foreclosure rates.

Chart 1 tracks the changing percentage of dwellings occupied by owners versus tenants in California. The sampling is indicative of our more populous counties. The data only surveys concrete numbers through 2016.

Chart 2 tracks the homeownership rate in California and a sampling of its more populous counties.

Chart 3 tracks the rate of rental vacancies in California and a sampling of its more populous counties since 1993. Rental vacancies tend to rise in times of increased homeownership and excessive residential construction. Dark bars indicate periods of recession.

Future vacancy rates will be influenced by:

  • current vacancy rates;
  • regional foreclosures;
  • regional job performance; and
  • residential construction numbers.

Renting into the future

Increasingly, Californians are turning to rental property for their shelter.

This heavy reliance on rentals comes after the historic spike in homeownership during the Millennium Boom.

In the past, the thought of owning a home was driven by the noise of warped public policies and the distraction of ever more subsidies. The government intended to get tenants out of rentals and into homeownership.

Favorable personal attitudes about homeownership climbed for about 60 years. Then, in quick succession, we experienced a pricing bubble, a recession and a once-in-a-lifetime financial crisis.

Today, many households are still recovering from the financial chaos of the 2008 recession and lengthy recovery. The renter population has swelled, as fewer are able to buy after dealing with years of underemployment or unemployment. This has led to a supply issue, as more renters compete for multi-family units in desirable areas where zoning restricts builders from meeting demand. This has caused rents to rise much more quickly than income.

Recovering from foreclosure: to own or to rent

Many former California homeowners lost their property to foreclosure in the days following the 2008 recession. These owners suffered income loss due to unemployment. Some were simply unable to make payments when the time came to fully amortize a complex adjustable rate mortgage (ARM).

Financially unable to buy a replacement home to house their family, many homeowners moved into comparably-sized SFR rental property in the same school district. At first, the monthly rent was less than their previous mortgage payment. However, as rents have risen quickly in the past couple years, many renters are now looking to homeownership once again. But — their credit scores are often too damaged by the foreclosure (or short sale) to qualify for purchase-assist financing to buy a replacement home. Further, pouring high amounts of their income into rent disallows them from saving up for a down payment on a new home.

These renters-by-necessity are foreclosed-out homeowners and forced-out short sellers. They have no savings, damaged credit scores and an enduring emotional aversion to homeownership — at least in the foreseeable future.

So, for the next few years these families will live in rented homes. These and others have forfeited the tattered American Dream of homeownership for renting.

Related article:

Will foreclosed homeowners and short sellers return to homeownership?

This situation is now a full blown reality for homeowners across California. At the end of 2016, California has one of the lowest homeownership rates in the nation at 53.8%.

Rentals as a percentage of all housing are highest within high-density metropolitan areas, especially in cities like San Francisco and Los Angeles. On the other hand, there are areas of traditionally high homeownership, like Riverside/San Bernardino and Sacramento. These regions have maintained a lifestyle focused on suburban housing, even through the difficult years of recession and today’s ongoing recovery. However, signs indicate that housing habits are changing even in these homeownership outposts.

Jobs’ impact on homeownership

Future homeownership rates depend upon the coming wave of first-time homebuyers. These homebuyers are typically aged 25-35. Often, they will purchase a low-tier or mid-tier SFR for their first homes.

Job loss, however, has changed the timing of homeownership in almost every region of California. First-time homebuyers are declaring themselves financially unable, or just plain unwilling, to purchase a home in spite of cyclically low prices and mortgage rates. The more realistic age of today’s typical first-time homebuyer is 30-40 years.

As jobs continue to return, they arrive first and fastest in city centers. After the distressing behavior of the housing market in the recent recession, more of the newly employed will be renting than owning while they amass down payments.

Related articles:

Will first-time homebuyers save California’s homeownership rate?

Future rental construction will increase

An increase in rental activity will naturally be followed by an increase in rental construction. As vacancy rates linger below historic norms (generally near 5% averaging 4.1% in 2015) and rents rise beyond the rate of inflation, multi-family construction will return to keep rents and prices down.

Apartment and condo construction was at its lowest in 2009, and has increased very slightly each year since then. Builders will compete with existing rentals to meet the increasing demand for centrally located rental units.

Construction for SFRs, on the other hand, will increase much more slowly. Builders will have little incentive to build, as dwellings occupied by renters are likely to increase through 2016. Builders rely upon buyer-occupants to support new home construction, culling out speculators as buyers. Builders will continue to bide their time until sales volume figures for buyer-occupants pick up. [See Chart 1]

Related article:

The rising trend in California construction starts

Homeownership by county

Counties like Riverside were at the center of California’s housing boom in the early 2000s. During the Millennium Boom, homes were built and sold faster than was sustainable in the long term. Riverside’s homeownership rate jumped almost 6% in 2000-2005, pulling the state’s rate of homeownership up with it.

Those homeownership gains were illusory. Since 2005, Riverside’s rate of homeownership has dropped to 61%, six percentage points below its level at the peak of the boom. The gains made in the last decade have been entirely erased and the decline continues.

With every statewide trend, of course, there are exceptions. San Francisco County experienced a less noticeable dent in homeownership during the recession, and is holding steady around 56% in 2016. San Diego County averages 56%, though time will tell if this is able to be sustained. [See Chart 2]

San Francisco’s consistent homeownership rate is due to the general lack of SFR construction and prevalence of high-tier properties in much of the Bay Area. Further, their population has been less susceptible to foreclosure due to strong local employment in the information technology industry.

Many large southern coastal cities remain examples of past suburban sprawl and inefficient zoning. They have, however, begun to reorganize to a more sustainable, centralized model of higher density urban living.

Homebuyer demand shifts

Some who were burned by short sale or foreclosure will eventually return to the homeownership. They will be joined by first-time homebuyers who have put off homeownership. This return will occur when their jobs, savings, deleveraging, credit scores and confidence in the economy permits them to do so.

Meanwhile, bedroom cities in the suburbs are replete with vacant SFRs and apartments, as those who lost their home are most likely to end up renting in urban centers. Homes in all price tiers are being purchased by buy-to-let investors who are intent on collecting them solely for the value they present in monthly rental income.

On the other hand, speculators acquiring real estate generally do so for growth only. They prefer to sell, as a day trader would, for a quick profit and without the inconvenience of a tenant. In the absence of willing homebuyers, many syndicators and speculators have altered their resale expectations, hybridizing their holding plans to include renting the properties to cut their carrying costs and wait longer to sell.

Vacancies by county

Rental vacancies are driven by varying local demand. The key factors influencing vacancies are the local jobs situation and the local attitude toward SFR homeownership and renting, which change over time.

For instance, Sacramento and Riverside both experienced massive vacancies during 2006 into the early days of the 2008 Great Recession. Since then, these areas have seen rental vacancies drop dramatically. The many foreclosed homeowners in that region have taken up available rental inventory.

The rise of rental property

Trends point to a continued increase in rental demand in upcoming years. While some regions, especially Riverside, will take a longer time to shift from the 1950’s standard of suburban SFR homeownership, rental property is poised to lead the real estate recovery. Even in counties with higher than average homeownership rates, rentals will emerge as significant profit centers for landlords and property managers.

Agents in urban areas may consider adding property manager to their title, as demand for this skill will undoubtedly rise throughout this decade. Also, following the local construction and job trends will help agents prepare for future demand in their communities.

SFR homeownership is nowhere near becoming obsolete. But its 30-year dominance is definitely a relic of the past.

Related article:

Rentals: the future of real estate in CA?