Renters' share of high-income households moderates.

The pattern of construction of upscale units that dominated the apartment construction market the past several years may be changing. This market segment had thrived as many Baby-Boomers aged into the high-income age cohorts and elected to remain renters. Renters' share of high-income households increased from 1998 through 2001. Shares of renters among high-income households began to moderate slightly in 2002 and dropped more significantly in 2003 and 2004. Low mortgage interest rates were a major factor in the decline encouraging ownership, but increased interest in condominiums also had an effect. The natural demographic factors that affected the rental market in general also cannot be ignored.

Mortgage interest rates dropped to more than 40-year lows in 2003 and 2004 and the share of renters of total households fell. Actually the renters' share declined beginning in mid-1994 as the national economy recovered from the 1990-91 recession, supported by falling interest rates on mortgages. The share of rental households dropped from a high of 36.1 percent in second quarter 1994 to a record low of 30.8 percent in fourth quarter 2004. Each percentage point now equates to more than 108,000 households. Thus, in fourth quarter 2004, there were more than 5.7 million fewer renter households than would have existed if the renter share of households had not declined.

The aging of the Baby Boomers alone is a major factor in the decline in the renter shares of total households. The renter shares of total households decline sharply with age. Last year, the peak renter share was in the 20 to 24 years of age cohort at 75 percent. The low of 16.6 percent was in the 65 to 74 years of age cohort. A majority of Baby-Boomer households are more than 40 years of age and are in cohorts with below-average renter shares. A positive for the rental market is that a strong possibility exists that the renter share has bottomed and will rise markedly in the second half of this decade. Echo Boomers will enter the housing market in significant numbers as the end of this decade nears and the next begins.

The strength of the upscale rental market is visible in the shares of renter households by income groups. Observing the strength requires going beyond a simple view of shares at a point in time because renter shares decline as income rises. About 75 percent of all households with income of less than $5,000 were renters in 2004. It dropped to about 11 percent for households with incomes of $75,000 of more. The share of high-income households that were renters peaked at 13.3 percent in 2001, up from a low of 9.9 percent in 1998. More important to the rental market is the fact that persons with incomes of more than $75,000 was the fastest-growing group--it nearly doubled from 1994 to 2001, from 13.5 million to 26.8 million. Renters with incomes of $75,000 or more increased to 3.5 million in 2001 from 1.6 million in 1994. The number of high-income renter households has dropped since 2001 to 3.3 million. This is still a large number of high-income renters, but a return to future growth is more uncertain.

Reliance on the high-end rental market has other limits. The overwhelming majority of renters have more limited incomes. Renters had a median income in 2004 that was 51 percent of that of homeowners'--$27,898 versus $54,614. The ratio has declined from 55 percent in 2004.

Changing demographics in coming years will affect the high-end rental market. Echo Boomers entering the housing market will have lower incomes. The median income for rental households less than 24 years of age was $19,313 in 2004. Household incomes peak in the 45 to 49 years of age cohort and a large number of the Baby Boomers have reached 45 years of age, and their number will rise markedly during the next several years.

Robert J. Sheehan is NAA's consulting economist. He can be reached at 703/491-7377 of [e-mail].