By: Don Ganguly, CEO, HomeUnion
When it comes to housing, there have been many studies and polls on what Millennials will or won’t do. In 2014, the prevailing wisdom seemed to be that Millennials were into renting, not owning. But if you listen to Fannie Mae and the National Association of Realtors this idea has shifted. Now Millennials want to own, but they’re taking longer than Gen X-ers and Baby Boomers did at the same age because they’re taking longer to settle down and start a family.
Another reason why Millennials aren’t buying homes now and why they won’t be any time soon is a combination of economic ability and sheer preference. According to The State of the Nation’s Housing 2015 report, released by Harvard University’s Joint Center for Housing Studies (JCHS), the national homeownership rate fell for the tenth consecutive year to 64.5 percent while renter households rose to a 20-year high of 35.5 percent in 2014. And The Urban Institute projects that renter households will grow from 40.7 million in 2010 to 47.9 million in 2020 and 53.7 million in 2030.
What these studies are showing is that household formation is finally getting up to where it should be, but the new households being formed are renter households. And Millennials aren’t the only new renters in the market. The mortgage crisis transformed approximately four million homeowners into renters.
Yes, the economy is getting better, but, despite what a small subset of coders from Silicon Valley and those in the Wall Street bonus pool may be experiencing, the economy is not booming. According to the United States Census Bureau, more than 42 million Americans earn less than $50,000. Add to that – slower wage growth, stricter mortgage standards and rents rising 4.3 percent annually, according to Zillow, it could take the average household 12.5 years to save for a 20% down payment.
Like it or not, there’s no question that there’s a growing wage and asset gap within our society. In addition, many Millennials have grown up watching their parents struggle with housing issues and many don’t feel comfortable giving away their life savings or getting into even more debt to buy a home. So, for the foreseeable future, our country has a growing rental class, which is why we believe the single-family rental (SFR) market is a good investment.
Single-family homes are gaining in popularity, housing more than half the growth of renters in 2004 to 2013. And they attract a variety of households—middle-aged, married couples with children, married couples without children and single-parent families, —because of their established educational, community and economic infrastructure, which is geared toward families.
These trends haven’t gone unnoticed. Companies like Colony Capital and Black Rock have already jumped into the SFR market to provide asset-based lending and hedge funds are buying up portfolios of thousands of rental homes, but despite these activities, retail investors make up more than 97 percent of the market, but they buy locally and usually sub optimally. But there is still an opportunity for individual investors to take advantage of the SFR market by using advanced investing tools.
Traditionally, the SFR market has been dominated by smaller investors who purchased and maintained houses near their homes. Of course, not everyone is inclined to be a landlord or can afford to buy a second home in the same neighborhood they live in. For smaller SFR investors looking to maximize their investments, companies like HomeUnion can help by leveraging technology, data and industry expertise to find markets and houses to invest in, then take care of the entire acquisition process as well as the ongoing management of the property.
In addition, new lending options are providing more liquidity to this market. Now investors who don’t qualify for GSE loans or want to build portfolios with more than the nine investment mortgages allowed by the GSEs, can turn to asset-based lenders. These lenders have recently expanded into the SFR market and are making loans based on the ability of a property to generate enough income to service a loan.
JCHS projects that Millennials will form more than 20 million new households between 2015 and 2025, most of which will be renter households—which means the rental trend is here for the long haul. If individual investors want to be part of this growth opportunity, they’ll need to find the right vehicle and process to take advantage of these economic trends.