Though the economy recovered throughout 2014, fallout from the financial crisis continues to impact how many Americans approach the real estate market. The U.S. Census Bureau found only 64 percent of Americans own their homes. This represents the continuation of a downward trend that began around 2004. Since that time, homeownership rates have dropped over 5 percent, and the slide accelerated during 2014.
Several years of tight lending requirements and pervasive unemployment have forced many to update their views on financial success, but this does not fully explain the drop in homeowners. While homeownership has historically been important to the American dream, U.S. society is starting to favor rental opportunities, and this presents an opportunity for people investing in rental homes. Improved demand for rental opportunities promoted record-setting rental growth over the past 15 years, and this shift is likely to continue.
Debt: The prime reason to rent currently
There are always numerous reasons why people choose to rent versus own, such as not having to take on the burden of the building’s external upkeep and being able to move relatively easily. But the current drive toward rentals is largely the result of younger people’s shaky financial footing. More than 40 million Americans struggle under a collective $1.2 trillion in student loan debt, according to data collected by Experian. That financial burden forced many young people to move in with family members immediately after college and will prevent those individuals from purchasing a home as they finally start to live on their own. In fact, Experian found that many people aren’t able to keep up with their student loan payments, with 39 percent of open student loan accounts being in deferment at the end of 2014.
Financial instability suppressed desire for homeownership and replaced that hope with concern about outstanding debts. Millennials are less likely to make large purchases that require a loan. According to Pew Research Center, young people are less likely to purchase a home or carry unpaid credit card charges than their older counterparts. The number of first-time homebuyers hit its lowest level in nearly 30 years during 2014, according to the National Association of Realtors, and tight credit continues to make it difficult for young people to secure financing. This trend will prevent many millennials from entering the homebuying market in 2015.
It’s not just young professionals with debt, either. In the post-recession economy, household debt has exceeded an average of $30,000 for people 35 and older, according to Pew. The focus on repaying these loans makes people less willing to take on a mortgage, which Experian noted requires an average monthly payment of over $1,300.
The movement toward rental properties is unlikely to slow for some time. John Burns Real Estate Consulting conducted a survey to analyze the homebuying habits of young people and discovered homeownership is closely tied to marriage. In a bit of good news for rental property investors, Pew found a record number of Americans are currently unmarried, which means the rental boom could continue for the foreseeable future.
An opportunity for investors
The rental market’s recent expansion is not the result of a fad, but is instead the manifestation of a demographic shift that may affect the housing market beyond 2015. A crushing debt burden makes it impossible for people to pursue homeownership, and societal and demographic changes have removed many people’s desire for a home. By investing in the rental market now, people can benefit from the continued growth the sector will experience.