Almost since the turn of the millennium, the "housing bubble" has been front page news and editorial page speculation. But that's only half the housing story. What has been happening in the rental housing market is unprecedented; also, it is important for understanding what has really been happening to home prices and home sales.
The rental market is the other side of the boom - the dark side, for rental property owners, the bright side for families looking for a bargain. For the first time in US history, the absolute number of renters has been falling. There are fewer now than there were 10 years ago. The number of renters peaked at 35.7 million families in early 1995. By mid-2004, it was down to 32.6 million. There has been a modest increase since then, to 33.7 million; at that rate, the 1995 peak will not be reached again until the end of the decade. At the same time, the number of owners has increased by more than 11 million, from 64 million in early 1995 to 75 million today. It will be close to 80 million by 2010.
(It's useful to bear in mind the distinction between numbers and percentages. The homeownership rate has been rising through most of the past century, but population growth has meant that the absolute number of renters, as well as owners, has been increasing. The number of owners dropped slightly in the Great Depression; the number of renters has never dropped over any extended period.)
Rental property owners face extraordinarily high vacancies. Currently the national vacancy rate is just under 10 percent. To put this in context, the traditional dividing line between "tight" and "loose" rental markets is a 6 percent rate. In several large metropolitan areas, the rental vacancy rate is above 15 percent - not just older slow-growth industrial areas like Cleveland and St. Louis, but also rapidly growing areas such as Atlanta and Houston.
This decade-long trend has been largely overlooked. One reason may be geography. Rental markets are tight in and around New York City and Los Angeles - not just the two largest cities in the US, but also the two media centers. But these are almost the only tight markets among the 75 largest metropolitan areas, containing almost two-thirds of the rental housing stock. (Only Boston and Honolulu are also tight.) West of New York, and east of California, double-digit vacancy rates are the norm.
This fact only attracted attention in the aftermath of hurricane Katrina. A couple of weeks later, the press noticed the ready availability of vacant rental units in nearby Southern cities, but treated it as a convenient coincidence.
It was convenient, but more than a coincidence. About 300,000 low-income families were displaced by the hurricane. The Census Bureau counts more than 1.1 million vacant rental units in the South alone that rent for less than the $800 monthly housing assistance the Federal Emergency Management Agency has provided to refugees; there are another 1.4 million in the rest of the country.
It's worth keeping the rental market situation in mind when reading the next round of stories about the housing bubble. The long-term shift from renting to owning indicates that the bubble is really pretty solid. Mortgage lenders are better able to provide homeownership opportunities. They have the technology to assess risk more accurately, and reach further down in the income distribution to identify reasonable would-be first-time home buyers. These families share the "American dream" of owning their own home.
As homeownership increases, house prices will continue to rise - not every month in every market, but from year to year broadly across the United States. And a substantial supply of rental homes and apartments will be available as well.
• John C. Weicher is director of the Center for Housing and Financial Markets at the Hudson Institute. From 2001-05, he was assistant secretary for housing and federal housing commissioner at the US Department of Housing and Urban Development.