A Generation of Renters Means Opportunity for Investors

A Generation of Renters

family of rentersAs you ponder the risks and rewards involved with real estate investing, the most important thing to remember is that the longer you own a rental property the more money you will make. The distinguishing advantage of owning a rental is the rental check you receive in the mail. It is hard to find another investment of any kind that pays off so quickly and reliably. Cash flow is the key.

Its one thing to research the near term demand for rentals in a particular market or the nation as a whole. It’s harder to forecast the rental demand five, ten, even twenty years in the future. Or is it?

Attitudes towards housing and homeownership are changing and behavior follows. How the coming generation chooses to live will shape the real estate economy for decades to come.

They’re called the millennials because they span the end of one millennium and the dawn of another, since many were born between 1982 and 2004. Some 80 million strong they are nearly the same size as the post-war Baby Boomers. They are now entering the years when their parents and grandparents tended to form households and think about buying homes.

The Millennial Homeownership Crunch

However, they are not buying homes. Recently USA Today analyzed U.S. Census Bureau data and found that the homeownership rate declined 7 percentage points for 25- to 34-year-olds from 2006 to 2011, falling from 46.7% to 39.7%. That’s the largest decline in a homeownership rate among all age groups. In contrast, the homeownership rate for all ages fell only 2.7 percentage points to 64.6% during the same period. Among households headed by 25- to 34-year-olds, renters increased by more than a million from 2006 to 2011, while the number who own fell nearly 1.4 million, the analysis showed.

Is this retreat from homeownership a temporary situation or a sea change in the way an entire generation thinks about homeownership? Or is it the result of lingering student debt, tougher requirements to get a mortgage and income levels that trail what their parents were making at their ages? After all, young Americans are experiencing a serious decline in their employment prospects. Between 2000 and 2012, job opportunities for young adults have become increasingly scarce. According to a study by the Brookings Institution, the employment level among Americans 20 to 24 years old dropped by 5.5 percentage points between 2000 and 2012, while the employment level for adults over the age of 25 dropped by only 1.3 percentage points over that time.

peter panThe Peter Pan Syndrome

As time passes and the economy slowly improves, millennials’ interest in buying homes has not markedly changed despite warnings that interest rates and housing prices will be higher in the months and years to come. Concerns are growing in the housing industry. Is there more than financial concerns behind their rejection of homeownership?

An executive on the Trulia web site recently called the attitudinal change the “Peter Pan Syndrome”. ‘“I don’t want to grow up!” By far, this is the millennial mantra. More often than not, this group has the income to own, but choose to rent in an urban metropolis for the experience after college. Flexibility to come and go, without responsibility to a certain location is very attractive.

“Owning a home is a huge milestone in any individual’s life. However, who’s to say that is still society’s norm? Perhaps renting is the best option for these “satisfy-me-now Millennials” who prefer things a la carte. One could look at the rise of peer-to-peer car sharing companies such as ZipCar or Lyft as further evidence that this generation yearns for constant change. Further examples include the jobs young adults take on before truly deciding their calling. Notice I stated “jobs” and not “careers”. Renting works in a similar fashion, where there’s more room for trial and error,” wrote Peter Cid, Rental Market Manager.

Generation RentGeneration Rent

A recent story on National Public Radio went even farther in describing how “In a nation where homeownership is part of the American dream, a generation of renters could alter communities where they live and redefine the idea of middle-class success.”

“They’ve seen what their parents are dealing with, what their brothers and sisters are dealing with, in terms of being saddled with home values that are less than what was paid for,” says Paul Conway, a former chief of staff for the U.S. Department of Labor who is now president of Generation Opportunity, a think tank specializing in the economics of Generation Y.

Sociologist Katherine Newman, who chronicles some of the struggles in her book The Accordion Family: Boomerang Kids, Anxious Parents, and the Private Toll of Global Competition, agrees with Conway that we may be witnessing the creation of a generation of renters.

“I’m hoping that the Millennial Generation doesn’t set its sights on homeownership as a benchmark of economic stability, because it’s going to be out of reach for so many of them that it will just be a recipe for frustration,” she says.

Rolf Pendall, a housing expert at the Urban Institute think tank, says too much emphasis has been placed on homeownership in the past few decades, not only by individuals, but also by governments and policymakers. So a shift in attitudes might be a good thing.

Sea Change or Slow Start?

Will better economic times lift millennials into the homeownership lifestyle? Or will they, or at least large numbers of them, continue to defy expectations and remain mobile, flexible and renting? When they have children, will they pass along these values, creating future generations that will rent for at least a significant portion of their adult years? Food for thought… with extraordinary implications for the demand for rentals for decades to come.

What do you think? Do the young adults you know fit the descriptions above? What about the financial issues ranging from under employment to student debt to saving for a down payment facing young families thinking about buying a home? How long do you think they might have to rent a home before they could afford to buy?

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