Thursday, June 2, 2011

Are We Growing A Generation Of Renters?

A fascinating story is out this week, courtesy of Harvard University's Joint Center for Housing Studies, and it suggests that we may be creating a generation of renters -- people who are either too hesitant about private home ownership, or don't want to risk losing a home as they have seen family or neighbors.

The State of the Nation’s Housing report released this week verified a number of trends

my colleagues and I who work the multifamily market have seen emerging for many months now. One stat is that renter households keep growing. The report said that from 2006 to 2010, renter households increased 692,000 annually on average, to 37 million. In the same time span, the number of owned households fell on net by 201,000 annually.

The report also notes that renters who have put off homebuying and homeowners who became renters again are driving this shift. Even as the number of households aged 25 to 34 increased one percent from 2007 to 2009, the number of households that bought their first house decreased 14 percent. The number of first-time homebuyers between 35 and 44 fell 21 percent.

Not surprisingly potential buyers are waiting it out. “With home values still falling in many markets, even would-be homebuyers appear to be waiting on the sidelines until they are convinced that prices have bottomed out,” the report said.

But (and its a BIG but...), things could be moving too far the other way though. With rents for professionally managed apartments moving up 2.3 percent from the fourth quarter of 2009 to the fourth quarter of 2010 around the country (according to information cited from MPF Research), the Harvard report says that some renters could again start to think about buying. In particular, the report cites a Fannie Mae National Housing Survey that reported the percentage of renters saying they will probably continue to rent fell to 54 percent in the first quarter of 2011 from a peak of 59 percent in June 2010.

For now, however, a growing number of Americans can't afford a home or don't want to own one, a trend that is spawning a generation of renters and a rise in apartment construction across the U.S. As I have written before on these pages, many of the new renters are former owners who lost homes to foreclosure or bankruptcy. And others? They feel it is too costly. Or too risky. Or the doubt a home's potential appreciation. Unfortunately, if purchased "right" (and it is easy to do now since inventory is high, prices are low and interest rates are bottomed out), homes today will surely appreciate nicely over the next decade.

At this writing, nearly 38 million households (not people, but households) in the United States are renters. Also, as noted earlier, demand is driving up rents, and spurring new construction. Which again is why we are seeing multifamily prices on properties remaining high, as demand is keeping ledgers in the black.

Interestingly, before the housing bust, mortgage rates were so low it was often cheaper to buy than rent (plus you got all those great tax deductions as a homeowner). According to Moody's Analytics, a decade ago it was cheaper to buy than rent a home in more than half of the 54 biggest metro areas. Today, it is cheaper to rent in about 72 percent of metro areas.

One fascinating aspect to all this is the talk about the so-called "Millennials," the children of the Baby Boomers. Millennials are not quite as attached to the single family detached residence in a far suburb. They watched their parents commute long hours to jobs, either in cars or by train (at least on either coast). Long drives, combined with the high price of gasoline, has them shunning the McManse in the fringe suburbs. They would rather live in urban centers in apartments, or condos, or renovated houses. And when you look at cultural trends, an incredibly large percentage of young people say they have no plans to ever have children. These shrinking family sizes means that fewer people aspire to a suburban lifestyle.

I never twist someone's arm if they don't want to invest. It is a personal choice. But if you are going to buy, buy for investment and be selective. I was talking to a colleague earlier today in Cincinnati, and we agreed. There is still time. If a prospective buyer is on the fence, rent where you want to live, and invest your funds in a property that can be treated as a commerical/investment vehicle. Where you can take full advantage of the many tax deductions available with investment properties (and not with a personal residence).

For as many of us have said, a house is NOT an investment unless you are charging your children rent for their rooms.

Either way, the even heavier pressure on multifamily is a boon for the time being, both for owners and for investors who get in sooner rather than later. But the "buy-right" time on multifamily may already be past.

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