Homeownership has always been one of the main pillars of the American Dream. Becoming an adult, getting a job, building a family and then owning a home have made up the foundation of what the American Dream is comprised of for years.
But over the last few years, the homeownership piece of that dream has begun to change somewhat. As millennials are getting older – defined as being between the ages of 22 and 37 – they are quickly replacing Baby Boomers and the generations that followed as the largest cohort of homebuyers that drive the market. And there’s one interesting tidbit to millennials’ thinking that has caused a shift in the homeownership trends: Many see homeownership as a choice instead of a necessity.
A recent survey of 2,000 millennials conducted by Northshore Fireplace found that 65 percent of millennials think that way, while 40 percent of the generation view homeownership as a financial burden. Millennials are increasingly more worried about homeownership than other generations of Americans have been in the past.
Among their top concerns, according to the survey, are:
- The burden of paying a mortgage (41 percent)
- Unforeseen maintenance issues (35 percent)
- Being locked into one location (17 percent)
- Upkeep (7 percent)
This change in mindset for the generation that is driving the growth, or lack thereof, of homeownership rates in the country is helping to fuel the rise in the rental rates and the projected immense opportunities for investors to take advantage of the single-family rental market.
Homeownership on the Rise, But Way Below Peak Levels
Optimists who are looking for good signs in the rate of homeownership in the country will point to a recent U.S. Census Bureau survey that found homeownership rates rose to a four-year high of 64.8 percent in the fourth quarter of 2018. In fact, homeownership rates have steadily been on the rise since it hit a low of 62.9 percent in the second quarter of 2016.
To further back this optimism, a CoreLogic report revealed a majority of this growth has come from renters who are transitioning to becoming homeowners. The number of new renter households has dropped for six out of the past seven quarters, decreasing by 167,000 households in total, according to CoreLogic.
What’s more, homeownership among the upper half of millennials in terms of age is strong. The homeownership rate for those 35 years old or younger increased a half-percentage point in 2018.
While all these statistics would seem to be positive – and any steady uptick in homeownership rates is good for the real estate resale market – it still ignores the fact that today’s rate is significantly lower than it was at its recent peak. Back in 2004, when most millennials were too young to even think about owning a home, homeownership rates were close to 70 percent.
Of course, a lot has changed in that time, including a recession and a housing market crash that dramatically reduced the number of people who owned houses. Since that time, homeownership rates were on a steady decline, until they started increasing again in 2016.
But what’s interesting to note is that now, 15 years after that peak in 2004, when almost all millennials are in the stage of their lives where homeownership would normally be attainable, they are choosing instead to hold off on buying a home, whether by choice or because of outside forces such as affordability and finances.
What Are Current Millennial Homeowners Saying?
One-third of those who were part of the Northshore Fireplace survey included millennials who are homeowners, to get a sense of their thinking and how they view homeownership since they purchased a home. In terms of down payments, 53 percent said they paid for it with personal savings, with 14 percent saying their parents helped them to pay the down payment.
Of the millennial homeowners surveyed, 30 percent said they had to relocate to find a home in their price range, with Texas, Washington and West Virginia being the most popular places to relocate.
In total, only 15 percent of this cohort said they regret buying their home. Among their top regrets were:
- They wish they put a larger down payment.
- They bought the home too soon.
- Their home is too small.
- They’re worried about making mortgage payments.
- They’ve had maintenance issues.
It’s a good sign that a large majority of those millennials who are homeowners are happy with their decision overall, but something is still keeping many millennials away from purchasing a home. In fact, among the survey respondents, 20 percent rent and live alone, 26 percent rent and live with roommates and 20 percent live with their parents.
What’s Keeping Millennials from Buying a Home?
There are a number of factors that are driving millennials’ mindset when it comes to holding off on buying a home, but most of the reasons are financially driven.
One of the telling areas of the Northshore Fireplace survey was that three-fourths of millennials surveyed said they can’t afford to buy a home right now. Only half of millennials have more than $2,000 saved for a down payment, and even if they did had enough money for a down payment, 40 percent of them said they would still prefer to rent.
Other financial factors preventing millennials from buying a home, according to the Northshore Fireplace survey, in the order of the highest rate of response, are:
- Student loan debt
- Credit card debt
- A car loan
- The desire to wait until they are married
- The lack of desire to want to buy a home
Despite these facts, 80 percent of millennials believe buying a home is a realistic goal in their lifetime, with 46 percent planning to buy a home in the next four years. That being said, when they do buy a home, 65 percent of survey respondents said they’d have to relocate to find a home they can afford, and 41 percent said the new location would have to be in a different state than the one in which they currently reside.
When that time does come, millennials believe their first home will cost $218,152 on average, and half of respondents want to put 10 percent or less toward their down payment. Possibly unrealistically, 45 percent of millennials expect their first home to be their dream home.
How Is This Affecting the Single-Family Rental Market?
With lower homeownership rates than the peak 15 years ago, the number of renters has increased substantially. According to Census Bureau data, 37 percent of Americans currently live in rental properties, which is the largest mark since 1965.
The segment of the rental market that’s growing the most might be surprising: It’s single-family homes. The Urban Institute has said single-family homes are the fastest-growing area of the American housing market, outpacing both multifamily housing and single-family homes for sale recently.
This, again, is due in large part to the habits of millennials. As the generation continues to age, they are starting families at a higher rate than 10 years ago, and are desiring to move away from city centers and urban areas in favor of suburban regions that are oftentimes more affordable and better to raise a family, in their minds. This trend is expected to increase in the future, too, creating a strong demand for single-family rentals.
What’s more, there is a major shortage in inventory of single-family homes for rent, making it a prime time to invest in the single-family rental market. This situation where demand is high and inventory is low will often result in a continued surge in rental rates, which was seen last year. CoreLogic’s Single-Family Rent Index report found national rent rates increased 3.1 percent in December 2018 compared to the year before.
Find the Right Tenant and Maximize the ROI of Your Rental
In today’s marketplace, it’s important that real estate investors in the single-family rental market view the arrangement as a partnership between tenant and owner rather than a simple transaction. Doing this will create a trust between owner and tenant and result in a long-term relationship that can result in continued positive returns and growth in income over time.
It’s important that investors do their research in markets throughout the country that are prime for single-family investments – markets that have affordable points of entry, a high demand for rental housing and good rental rates that will result in positive cash flow, and the ability to build equity and appreciation over time.
Traditional investing in the rental market only occurred in or near the investor’s location, as they served the traditional role of landlord looking after the property. But today, it’s much easier to partner with a company such as HomeUnion® that allows investors to research the real estate market across the country and put their money in the markets that are most attractive to them.
This gives real estate investors the best opportunity to earn the biggest returns on investment, as it’s not always the most expensive homes that will result in the greatest ROI. Instead, by partnering with HomeUnion®, investors can conduct detailed analysis to find a market that is primed for growth with a strong job market, a high demand for single-family rentals and a price point that works for them.
With those factors in place, it’s easier for real estate investors to find the best tenant in the best market that can provide them with the highest returns over the longest period of time in the single-family rental market.