Rentals: The future of California real estate?

California’s homeownership rate continues to fall in the fourth quarter (4Q) of 2012. Today’s homeownership rate is 54.1%. That’s down from 54.8% last year. Since non-homeowners still require shelter, the rental vacancy rate decreased to 5.4% in 4Q 2012. This is down from the vacancy rate of 5.9% a year earlier.

Homeownership was at its highest in 2006, at 60.7%. Since then, it has quickly decreased. California homeownership will likely drop to 51% by 2016 and remain at that level for about a decade as interest rates rise.

Chart 1

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Chart last updated 2/12/2013

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Chart 2
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Chart last updated 2/12/2013

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Data courtesy of the U.S. Census Bureau

California’s current state of homeownership

California’s homeownership rate is historically around 10 percentage points below the national homeownership rate (currently at 65.5% in the second quarter of 2012). This is due to a combination of factors; including the lesser impact the national policy of pushing the “American Dream” of homeownership has had on more mobile, free-spirited Californians.

California’s rate of homeownership has declined dramatically since the Great Recession of 2007, a full six percentage point drop since its peak year of 2006. The decline continues today. (If underwater homeowners are excluded from the number of homeowners since they have no equity stake in their properties, the California homeownership rate is more like 30%-35%.)

In a non-recession market, homeownership rates drop as interest rates move upward to cool the economy, as reflected in the rate of homeownership during the late 1950s through the early 1980s. Chart 1 displays the generally unacknowledged converse relationship between the average 30-year mortgage rate and the homeownership rate (and home price trends) from early 1980 until 2006, at the beginning of the current Lesser Depression.

However, due to our Lesser Depression brought on by the financial crisis, after 2007 both mortgage and homeownership rates have dropped in tandem. Today, the homeownership rate is still stabilizing, a correction of the effects of irresponsible lending during the Millennium Boom (not the fault of FHA or Frannie, but Wall Street bond market independence).

Further, the Federal Reserve (the Fed)’s third round of quantitative easing (QE3) will attempt to coax homebuyers out of the woodwork (since Congress has failed to do so) by lowering mortgage rates by continuing to supply money to mortgage lenders at literally zero interest. However, by 2016 the 30-year mortgage rate will again begin to rise, as it did in the ‘60s and ‘70s, and with that move, the homeownership rate will continue to lose strength before it fully stabilizes.

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