There was a time in America when owning a home was the pinnacle of personal achievement. People went to school, nabbed their first job, worked their way up the ladder and saved, saved, saved until they could buy a home.
People took pride in owning a home. It was a moment where they could stake their claim to having “made it” in life.
Today, things have changed. For some generations, the lure of homeownership isn’t as great as it was for others in the past. For others, homeownership is currently unaffordable, at least for now. This has led more and more people to turn to the rental market, but in a different way than they used to in years past.
There once was a time when renting a place to live meant congregating in a city or urban area in a high-rise building or other multi-tenant facility where everything was taken care of for you, and all you had to do was lay your head down at night on your pillow. But that has all changed.
Slowly but surely over the last 10 years or so, the rental market has expanded to include a significant segment made up of single-family homes in the suburbs. More people today who are choosing to rent instead of buy a home still want all the benefits a single-family home has to offer – from a quieter setting on tree-lined streets, to the space and comfort of multiple rooms, to good school districts for their children.
This has led, at least partially, to a strong single-family rental market, even as the price of existing single-family home sales have begun to slow. As CoreLogic pointed out in its Single-Family Rent Index report, national rents increased an average of 3.1 percent in December 2018, compared to 2.9 percent in December 2017.
As more people are turning to the single-family rental market, and as inventory continues to disappear, profits for real estate investors in this property segment are only expected to grow even more in the years to come.
Millennials Don’t Believe Homeownership Is Necessary
Millennials make up what used to be the largest segment of the single-family housing purchasers – those people between the ages of 22 and 37. For years, this was the segment of the population that did most of the single-family home purchasing throughout the country – as first-time homebuyers as they began to build their family lives, and then as second-time homebuyers when they upgraded their starter homes to something more permanent.
But this new generation of 22- to 37-year-olds just doesn’t have the same embedded desire to own a home as generations before them have. In fact, according to a recent Northshore Fireplace survey, 65 percent of millennials believe homeownership is a choice and not a necessity. What’s more, 40 percent of the survey’s 2,000 respondents viewed homeownership as a financial burden.
What concerns millennials are the burden of paying a mortgage, unforeseen maintenance issues, being locked into one location and the upkeep that owning a home requires. As such, they are turning instead to renting their housing, even as they get married and begin having children.
Baby Boomers Are Exiting from the Ranks of Home Ownership
At the same time as millennials are growing into the traditional role as the real estate market’s biggest purchasers of homes, the largest living generation in terms of numbers are about to exit the market – if they haven’t already. This “mass exodus” is expected to start in earnest in the mid-2020s, but some of it has already started.
According to Fannie Mae, the number of older people who exit homeownership is estimated to be between 13.1 million and 14.6 million between 2026 and 2036. That would represent an increase of 42 percent over the similar cohort over the last decade.
Baby Boomers, who were born between the years of 1946 and 1964, currently own 32 million homes, which represents two-fifths of all homeowners in the country. As this generation continues to age, they exit homeownership in favor of renting, for life at a senior care facility, to downsize to a smaller home or because they die.
This is projected to add a significant number of people to the single-family rental market, which is already flooded with high demand and low inventory, in two main ways:
- Those who sell their homes to become renters will mostly desire single-family homes to rent instead of apartments. Single-family homes allow them to live a life they’re more accustomed to, with the space to host their children and grandchildren in regions of the country that have more single-family homes than high-rise apartments or other styles of multi-tenant buildings.
- Those who choose to downsize will be fighting for the same lower-priced homes that the millennials are. This will subsequently cause a shortage in that segment of the resale market, driving prices up even more and making these homes even less affordable for the millennials. This could result in more millennials turning to the rental market than there already are, especially if they lose out on bidding for homes to the downsizing Baby Boomers who have deeper pockets than they do.
Renting Is More Affordable Than Buying
A major boost to the single-family rental market has been its affordability, compared to owning a home. Attom Data Solutions found that renting a three-bedroom home is more affordable than purchasing a home at the median sales price in 59 percent of markets across the country.
In 442 out of the 755 counties in the United States, it’s more affordable to rent that type of property than purchase it. What’s more, in only three of the 40 counties in the country that are home to more than 1 million residents is it more affordable to purchase than rent – Wayne County in Michigan; Philadelphia County in Pennsylvania; and Cuyahoga County in Ohio.
This is one of the major reasons why there has been such an influx in the rental market. According to U.S. Census Bureau data, there was an increase of 23 million people living in rentals from 2006 to 2016. Twenty of the largest cities in the country had more renters than homeowners in 2006, compared to 42 by 2016.
Cities Are Becoming Expensive
A recent report by Business Insider outlined just how expensive cities around the globe are getting. The report used 2018 fourth-quarter rent data to estimate how much a person would have to earn in monthly salary to afford a single-person apartment in major cities. These apartments measure roughly 540 square feet, and affordable was defined as spending less than 30 percent of income on rent, which is a standard the U.S. government uses for housing affordability.
The least affordable U.S. city, based on these criteria, is San Francisco, with a required monthly salary of $9,186. That would mean a person would have to earn an annual salary of $110,232 to reasonably afford a 540-square-foot, single-person apartment. Other U.S. cities on the list, with monthly and annual salary data points, include:
- New York: $9,084 per month ($109,008 annually)
- Boston: $7,667 ($92,004)
- Bay Area: $6,271 ($75,252)
- Washington, D.C.: $6,172 ($74,064)
- Los Angeles: $5,817 ($69,804)
- Miami: $5,412 ($64,944)
- Chicago: $3,916 ($46,992)
Keep in mind this analysis is just for single-person apartments. Multi-bedroom apartments that could house a family would only push the required salaries to afford them even higher.
The Suburbs Are Becoming More Attractive
As a result of the lack of affordability within cities, more people are moving out to the suburbs to find housing options. But they aren’t looking for apartment complexes and condos in densely-populated suburbs located just on the outskirts of these cities. Instead, they are searching for a completely different lifestyle with amenities a city can’t provide, all within relative driving distance of a major city.
Developers have started to recognize this fact, too, and they are starting to build amenities in suburbs throughout the country that cater to these residents. Some residential neighborhoods are re-zoning to allow for light commercial zoning, with developers building small restaurants and shopping centers in “downtown Main Street” type areas.
These suburbs are incorporating new amenities such as shopping, restaurants, nightlife and transportation with the old “standbys” such as walkable neighborhoods, tree-lined streets and strong public schools to attract even more residents from cities, and to cater to the desires of those already living there.
The Single-Family Rental Market Is Prime for Investment
In most markets nationwide, 80 percent of them in fact, home prices have risen faster than people’s wages, making homeownership out of range for a large number of people. This, coupled with the factors above, is creating an outstanding market for investors in the single-family rental segment.
Rent prices continue to increase across the country year over year, according to the CoreLogic data, and it’s happening in homes of all sizes and price points. In fact, lower-end rentals, which are defined as having rent prices less than 75 percent of the median of the region, increased 3.7 percent year over year in the last month of 2018. For high-end rentals, with rent prices greater than 125 percent of the median, rent prices increased 2.9 percent in that timeframe.
This shows the single-family rental market is prime for opportunity no matter what a person’s investment commitment might be. The key, then, is finding the right property with the ideal tenant in the right market that provides stability and growth.
The most attractive market in terms of return on investment isn’t always the one in which a person lives, though. That’s why partnering with a company such as HomeUnion® is so valuable to investors who want to get in on the single-family rental market. With HomeUnion®, investors can do their research on what properties in markets throughout the country would be the best fit for their investment needs.
And after doing this research and finding the right fit, investors can put their money in the markets where single-family rentals are in the highest demand, with the biggest expected returns.