The Great Recession and foreclosure crisis of 2007 – 2009 caused home ownership rates to plunge. 1.9 million fewer households owned a home in 2015 compared to 2006. But instead of being a temporary change, the home ownership rate continued to stay low even as the economy recovered and the population increased. In the past three years it had started to rise again. Then came 2020. The steep income drops in 2020 are sparking a shift away from home buying again as people dip into their savings to cover their everyday expenses and home prices continue to increase due to low housing supply. A report from Realtor.com, the National Association of Realtors listing site, says that on average it will take nine months to recoup a single month’s expenses.
In addition, there are societal and demographic changes that will affect, in a positive way, investments in multifamily real estate, especially in markets we are focused on. These changes might even be considered the biggest shifts since the baby boom in the 1940s and 1950s.
First, what are 18-hour cities? These are mid-size cities with attractive amenities, solid public transportation systems, modern infrastructure, strong economies, and lower cost of living than the biggest urban areas. They don’t operate on a 24-hour basis like the BigSix markets of Boston, Chicago, Los Angeles, New York, San Francisco andWashington, D.C.
Pre-pandemic, these eighteen-hour cities were increasingly seen as viable alternatives for living, especially for Millennials. Millennials are now the biggest generation and will continue to be a major part of the population for many years. As they start to form families, they find the expensive housing costs, low-rated public schools and higher crime rates of big cities less appealing. The pandemic and new ways of working, which are expected to be long-term changes if not permanent, has just accelerated this trend.
As baby boomers age, more and more of them are choosing to rent instead of own their homes. And baby boomers are the second biggest generation. From 2007 to 2017, there was a 43% increase in renters over the age of 60, according to a report from RentCafe, a nationwide apartment listing service.
Why is this happening? First, they are ready to downsize. They no longer need space for their children and their belongings. And the bigger the space, the more cleaning, maintenance, time and energy it requires. The maintenance will often be done by the landlord and they won’t have to worry about things like mowing the lawn or shoveling the walkway. They are ready for the next chapter. Second, they want flexibility. The most common lease term is one year and this allows them to move around and experience a new city or area until they choose their permanent home. Third, it is cheaper to rent. They are no longer looking to put big chunks of money and time into renovating a home. They would rather spend less money each month by moving into a rental without having to do any work. Lastly, they want to make other investments. Money that is not being used on home upgrades or improvements can be saved. They can then invest the money they save into their retirement fund or income generating assets.
The younger generations are more averse at home ownership and debt. They saw their parents’ struggles during the Great Recession of 2008, where they lost home equity and wealth and had a tough time recovering. This is why they choose renting more than generations of the past and it has also become more socially acceptable in the sharing economy. They are also marrying and having children later, which delays their decision to buy a home and continue to rent.
Even when they do want to purchase a home, many young adults have high student loan debt and struggle to save enough to buy a home. With more than half of all American students now having to go into debt to get through college, this is a common problem. Their average student loan debt topped $37,500 in 2020.
Due to these shifts, we will continue to see a decline in the homeownership rate in the upcoming years and increased demand for renting. It sure feels that it’s a good time to be a real estate investor and provide housing to this generation of renters.