Many Millennials Rent, But Keep Home-Ownership on Radar

Renters Remain Renters, Home-Ownership Struggles

Photo credit: LongLostCousin

Rental price increases don’t deter many as home-ownership falls to 1990 levels.

New Freddie Mac research shows that the commonly held idea that increasing rents push people into home-ownership, is not correct. This is according to a Harris Poll of more than 2,000 adults conducted online last August.

“We’ve found that rising rents do not appear to be playing a significant role in motivating renters to buy a home,” said David Brickman, EVP of Freddie Mac Multifamily. “This contradicts what some in the housing market think as they expect more renters ought to be actively looking to purchase a home. We believe rising rents are primarily a sign of increased demand rather than a signal that home purchases will be increasing.”

Brickman added, “Growth in the number of renter households is occurring amid an improving job market and economy. The demand for rental housing is increasing and an estimated 440,000 new apartment units are needed each year to keep up with demand.”

Rental housing growth has also increased the demand for property management companies. These firms, handling tenant screening and resolving disputes, are not the property management companies of old. The companies in the past had to combat negative perceptions such as poor customer service, cutting corners with maintenance and hostile relationships with tenants. Today, many of these companies have proven that they can be profitable and behave professionally and ethically.

Why rent?

The top reasons renters favor renting are freedom from maintenance, protection against declining home prices, more choices and flexibility in where they can live and mobility. These reasons were shared across generations with no major differences between Millennial, Generation X or Baby Boomer renters.

Although rents rose 3.6 percent in 2014 and are predicted to increase 3.4 percent above inflation in 2015, more than one-third of U.S. households rent their living spaces. According to the U.S. Census Bureau, all new household growth was driven by renters over the last six years. Millennials, the largest generation, are majority renters; although surveys show that they will eventually become home-owners.

But there are obstacles in the path to home-ownership for this generation. Limited inventory of affordable housing, tight credit and down-payment requirements make it harder for Millennials to participate in the American Dream. Stan Humphries, chief economist at Zillow Group said a likely interest rate increase by the Federal Reserve in addition to soaring rents, would drive more young people to explore home-buying. Real estate companies and agents which incorporate much transparency, or remaking open houses as happenings featuring craft beers, may be better poised to attract this “in-the-now” generation.

See Will Homes Become Less Affordable in Three Years?

See Freddie Mac Predicts Big Growth in Housing for 2015

Denver renter Eric Arther, said although more of his friends are considering jumping into home-ownership, but most are held back by a huge amount of student loan debt. He’s buying soon, as his lease is expiring in October. “It’s super nice, but it seems like the housing market is exploding in Denver so there’s a lot of opportunity there”, said Arther.

See Denver Housing Market See Robust Price Gains While Inventory Tightens

Some Millennials are buying

But Millennials push on and according to the National Association of REALTORS (NAR). In 2014 Millennials pulled ahead of Generation X as the largest home-buying generation, increasing their share from 28 percent in 2012 to 32 percent.

As Millennials get through their student loan debt, later family formation, and lack of down-payment funds hurdles, home-buying should increase among this group, according to Jed Kolko, chief economist for real estate website Trulia.

The NAR reported that the percentage of first-time buyers increased for the first time in November, with January showing 29 percent of home sales were first-time buyers.

See Big Increases in Millennial Home-Buying Expected in 2015

The number of renters expected to purchase a home is up by a difference of a million between 2014 and 2015, with 5.2 million expected to purchase in 2015, according to the Zillow Housing Confidence Index (ZHCI) . Ten-thousand households in 20 cities were surveyed as part of the ZHCI, it found that the share of renters wanting to buy increased in job-growth strongholds:  Atlanta, Chicago, Dallas, Detroit, Las Vegas, Minneapolis, Phoenix, San Francisco, Tampa and Washington.

See Metro Atlanta Housing Market Continues Expansion in April

See Atlanta in Top Ten of Most Affordable Large Metros

See Does More Confidence in Housing Equal More Millennial Home-Buyers?

Monthly house payments versus rental cost differences were reported in the latest report from RealtyTrac, in 76 percent of the U.S. counties, mortgage payments on a median-priced home is more affordable than the fair market monthly costs on a three-bedroom rental. This report’s analysis included 461 counties with a population of at least 100,000, with a total population of 217 million. The average fair market rents as set by U.S. Department of Housing and Urban Development represented 28 percent of the estimated median household income while monthly house payments (mortgage, taxes and home and mortgage insurance), including a 10 percent down payment, represented 24 percent of the estimated median household income. The down-payment may be a deciding factor.

“From a purely affordability standpoint, renters who have saved enough to make a 10% down payment are better off buying in the majority of markets across the country,” said Daren Blomquist, vice president at RealtyTrac. “But factors other than affordability are keeping many renters from becoming buyers, a reality that means real estate investors buying residential properties as rentals still have the opportunity to make strong returns in many markets across the country.

See New Mortgage May Increase Home-Ownership Rate

The Freddie Mac survey also shows that 38 percent of renters who have lived in their home for two years or more experienced a rent increase within those two years, while only 6 percent of renters with the same parameters experienced a rental price decrease. Seventy percent would like to buy a home, but cannot afford to while a third of all renters are satisfied with their rental experience with another 30 percent moderately satisfied. Nearly half (44 percent) of those who have experienced a rent increase indicated that they’d like to purchase a home and have started looking.

Housing market may be weakened by other reasons

There are some who believe that housing policies may make it harder for renters to become home-owners. David Stevens, the Mortgage Banker Association’s (MBA) president and chief executive officer, spoke passionately to a packed ballroom at MBA’s National Secondary Market Conference about how today’s housing policies are implicit in the sluggish housing market.

“Today the American Dream is in the penalty box, and the Justice Department and other enforcement agencies appear to be in the driver’s seat when it comes to the nation’s housing policy. Everyone working in the mortgage business feels like there is a giant target on their backs,” Stevens told the crowd.

Stevens acknowledged that it’s not just enforcement agencies and Washington that’s involved in the sluggish housing market.

“We acknowledged the role we played as an industry in the recession. As we set our sights on the pathway forward, regulators and enforcement agencies must own their role in the pace and path of recovery, especially who can achieve the American Dream and who can’t,” Stevens said.

“Today’s environment is not encouraging credit expansion,” Stevens said. “It’s forcing lenders to be overly conservative – ultimately failing entry-level homeowners on every front.”

Stevens listed a couple of changes that could go a long way towards converting more renters to home-buyers and truly heal the housing market.

Current lending rules need tweaking

“Federal officials should work with the industry and stakeholders to change the most problematic rules,” Stevens said. “Policymakers should utilize the industry as a partner, as an advisor. We are the ones who actually do the lending, but our hands are tied and the perception of the lack of trust remains.”

The dialogue must change

“We’re operating in the safest, soundest lending environment in decades. Consumers should feel confident in applying for loans and purchasing homes. Policymakers should champion this environment and do a victory lap letting consumers know they are well protected and that they can trust the system,” Stevens said. “The dialogue of distrust must end. Regulators should understand the power that their message has over the mortgage market and just how their messages influence behavior.”

See New TILA-RESPA Disclosure Rules Simplify and Clarify

See Valuations Will Change with Fannie Mae’s Collateral Underwriter




HousingWire. MBA’s Stevens: Today’s housing policies fail American homeowners

Bloomberg Business. Rising Rents Are Finally Forcing Millennials to Buy Houses

HousingWire. Freddie Mac: Rising rents aren’t pushing residents to homeownership

U.S. Census Bureau. Residential Vacancies and Homeownership in the First Quarter 2015

RealtyTrac. House Payments More Affordable Than Fair Market Rents in 76 Percent of U.S. Housing Markets According to County-Level Analysis

Bloomberg Business. Once ‘Ugly’ Property Management Grows as U.S. Home Rentals Surge


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