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5 Reasons rentals are winning the war for millennials

(REAL ESTATE DATA) Let’s look at current and historical data to suss out exactly what the future holds for housing if Millennials stick to renting.

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home buyer millennial

The national homeownership rate has fallen to its lowest level since June 1965, the month that the Rolling Stones released “I Can’t Get No Satisfaction” and Peter Sellers and Romy Schneider starred in “What’s New Pussycat.” Only 62.9 percent of families now own the homes in which they live.

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“They” said homeownership wouldn’t get any lower because the largest generation in history, the Millennials, was growing up and getting ready to buy their first homes. “They” declared both 2013 and 2014 to be the “Year of the Millennials.” When that didn’t happen, “they” said it would only be a matter of time before Millennials usher in the next golden age of real estate.

Well, it looks like “they” were wrong

If you own a home or make a living buying and selling real estate, you’ve got good reasons to be concerned that homeownership not only won’t recover but could keep on sinking back to the levels of the early 1960s, when Psycho was released, and Roy Orbison recorded “Only the Lonely.”

rentals-winning

The truth is that over the past few years, Millennials have been withdrawing from homeownership, not embracing it.

Some hard data:

  • Four years into the housing recovery, the homeownership rate for owners younger than 35 has fallen to 34.1 percent, the lowest level since 1994. That’s just over half the national homeownership rate. Buyers aged 25 to 34 accounted for only 28 percent of home buyers last year, down from 30 percent in 2006. The share of first-time home buyers, who play a critical role in driving demand in local real estate markets, declined from 50 percent in 2010 to around 32 percent so far in 2016 – the lowest since 1987.
  • Through the second quarter, renters occupied about 36.3 percent of households last year, the highest figure in a decade. As Millennial homeownership declined over the past decade, the number of renter households under 30 years old rose from 10 million to 11 million, representing about 11 percent of renter growth in 2005–2015.

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How could this happen?

Survey after survey shows that most Millennials really want to own homes. Employment and income levels are steadily improving. Interest rates have been ridiculously low for several years. Mortgages are more available today than they have been since the boom a decade ago.

Lending standards are looser and low down payment options abound. Millennial buyers are better educated about the process and better qualified than their parents or older siblings when they apply. Virtually any young household with decent credit, two earners, and a little cash can buy a home.

Below are the 5 reasons why rentals are winning the battle for Millennials.

1. Homeownership has become the victim of its own success

Most homeowners are happy with the recovery to date, but they certainly aren’t hoping it will slow down. Since median national home prices hit bottom in February 2012 in Case Shiller’s national index, prices through June have risen 40 percent, an extraordinary recovery by any measure. But if you bought at the peak in 2006, you could still be 6 percent in the red. In fact, some 4 million homes, or 8 percent of all homes with a mortgage, are still under water and 9.1 million, or 18 percent, still don’t have enough equity to refinance or sell. Even owners who are back in the black lost nearly a decade of appreciation.

For young buyers, the price recovery is a nightmare. After rising an average of 10 percent annually over the past four years, median increases are now rising 4-5 percent annually. Their incomes aren’t rising anywhere near those rates. Moreover, prices are rising twice as fast for “affordable” price tiers.

Perhaps the cruelest irony is that in the handful of markets where Millennial incomes are highest — New York, San Francisco, Seattle, Boston, Los Angeles, Chicago — home prices are highest and rising even faster.

2. Mysterious inventory shortages artificially inflate prices

Perhaps NAR’s Lawrence Yun put it best when reporting a sudden drop in July sales. “Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month,” he said.

“Realtors are reporting diminished buyer traffic because of the scarce number of affordable homes on the market, and the lack of supply is stifling the efforts of many prospective buyers attempting to purchase while mortgage rates hover at historical lows.”

Sales are slacking off for the balance of this year, yet prices are still hot. CoreLogic forecasts that home prices will increase by 5.4 percent on a year-over-year basis from July 2016 to July 2017.

Prices are rising so much faster than incomes in hotter markets, that they are setting off “bubble alarms.”

A perfect storm of disparate factors is causing the inventory drought. Years of depressed new home construction has devastated new home inventories and battered home builders have taken years to regain production capacity. The lingering effects of the bubble and bust have kept equity-challenged owners from selling.

Some nine million homes — many former foreclosures that were inexpensive starter homes — have been removed from the ownership inventory and converted to rental. That’s nearly twice as many homes as Americans buy every year. Add to the list millions of prospective move-up buyers who can’t sell until they can find a new home that they can afford and too many Boomers who would rather “age in place” than sell the family home.

3. Debt is eating young adults alive

The price young adults are paying for college is well known. Some 43.3 million Americans with student loan debt, most of whom are under 40, have student loan debt. The average monthly student loan payment (for borrower aged 20 to 30 years) is $351.

Many Millennials have added their student loan debt burdens with consumer debt. According to Gallup research, more than one third of Millennials say they don’t have enough money to live comfortably, and many of those appear to be using their credit cards to supplement their available resources with high-interest credit.

Some 60 percent of Millennials making less than $48,000 a year enjoy spending money and most of them carry more credit card debt (58% more), more student loan debt (23% more), more auto loan debt (26% more) and more personal loan debt (18% more) than millennials who prefer saving.

4. Millennials will find it easier to stay put as rents are flattening faster than home prices

It takes time to finance, site, and build new apartments, but over past five years, apartment construction has been operating on overdrive to meet the Millennial demand. With more than 240,000 units expected to deliver across the top 54 U.S. markets this year, CoStar projects 2016 to be the peak year in the current cycle for new apartment construction. More than a half a million additional units are under way across the country, nearly twice the historical average since 1982.

The new capacity is already being felt. Apartment rental rates are actually declining so much in several of the nation’s hottest major real estate markets that the national annual effective rent growth rate fell to 3.1 percent in July, which recorded the lowest rate since 2.8 percent in July 2014, according to the latest report from Axiometrics.

Houston’s 2.2% annual effective rent growth in July marked the fourth straight month the metro was below zero; San Francisco saw apartment rents fall 1.21 percentage points to -0.7%, the first time the market was negative since April 2010; New York City posted a -0.2% annual effective rent growth in July, the first time it was in negative territory since January 2014.

As more units enter market across the nation in markets where demand has not been as strong over the next two years, look for rents to flatten and decrease. Most experts predict home prices will also cool, but rents are now rising slower than existing homes and are flattening out faster than home prices.

More importantly, rents in the hottest markets for Millennials are falling faster as capacity grows while inventories of affordable homes in those markets show no sign of increasing any time soon.

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5. Single family rentals provide a new option for Millennial households

No longer do young families have to buy a home to enjoy more space, a sense of community and many of the benefits of homeownership (good schools, security, and a sense of community).

Today, more than 15 million households and over 47.6 million people (about 43 percent of all renters) live in single family rentals. Millennial households can move into a single family rental in a neighborhood where they could not afford to buy.

These are more likely to be located in the central city and inner suburban markets than apartments. More than 40 percent of single-family rentals are located in central cities. They actually account for a slightly larger share (27 percent) of the rental stock in central cities than units in large multifamily buildings with 20 or more units. Price-wise, single family homes serve a wide range of the market, accounting for 37 percent of all unassisted units renting for less than $400 a month, but also having among the highest median rents of any other rental category.

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“They” are saying just give the Millennials a little more time

Incomes are improving. Mortgages are more accessible. Inventories will improve, and prices will moderate. Most Millennials still want to become homeowners.

Despite their track record, perhaps this time “they” are right, perhaps not.

Here’s one thing that’s certain: The passage of time does not favor homeowners (or the professionals who make a living from buying and selling houses) who want to see the values of homes appreciate.

The median age of homeowners has increased from 39 in 2004 to 44 in 2015, and it is still rising. As Millennials continue to delay buying their first homes, the number of years that they will own will decline. As their years of homeownership shrink, so too will the number of homes they will buy or sell during their lifetimes.

#millennials

Steve Cook is editor and co-publisher of Real Estate Economy Watch, which has been recognized as one of the two best real estate news sites in the nation by the National Association of Real Estate Editors. Before he co-founded REEW in 2007, Cook was vice president of public affairs for the National Association of Realtors.

Real Estate Big Data

Cities and states where renters eviction protection policies are still in place

(REAL ESTATE BIG DATA) Even though the national eviction ban has lapsed, 7 states and over 20 cities still have policies in place for renters eviction protection.

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UnTil Debt Do Us Part representing renters debt

Half of the renters in the United States still have some protections available due to the coronavirus pandemic.

Many of these renters were those who were tenants before, during, and “after” the pandemic though the effects are still lingering. Some new renters have had to enter the expensive rental market scene after being discouraged when attempting to buy a home. Those that are over the bidding wars, rising prices, and dwindling options are stepping out of the home buying process and are opting to rent instead, driving rental prices sky-high. It’s a lose-lose situation either way.

The Supreme Court ruled in August 2021 that the national moratorium on evictions was overreaching, even though the policy had been in place since September 2020. In response, many states and cities are setting their own limits.

Even though the national eviction ban has lapsed, 7 states and over 20 cities still have policies in place for protection. More than 15% of renters are behind on payments with the average debt owed is $3,700. Though in some areas, the debts amount to $10,000 per household.

New Jersey and New York tenants can’t be evicted until the new year in most counties. In New Mexico, renters also can’t be pushed out for late payments, but the end date for that protection has not been established.

In Connecticut and Virginia, landlords can’t evict tenants who have applied for federal aid. In LA, the eviction protection ends January 31, 2022, in Austin, TX, December 31, 2021, and in Seattle, January 16, 2022.

In Oregon, Massachusetts, Michigan, Minnesota, and Washington D.C., eviction proceedings are paused for those that have their renter’s federal assistance application pending. In Nevada, showing that you’ve applied for rental assistance is considered a defense against eviction until June 2023.

$45 billion in aid is allocated by Congress for federal rental assistance, but less than $13 billion has been used so far.

If you are still in need of assistance and don’t reside in any of the areas above, consult location advocates and learn your rights to see what protections are available to you.

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Real Estate Big Data

5 ways AI is shifting real estate and how to capitalize on it

(REAL ESTATE BIG DATA) Artificial intelligence is bringing a seismic shift to commercial real estate in everything from investing to sales to property management. Hold on!

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Woman working at desk with multiple desktops open to AI tools.

Forget about that location thing. Now real estate – especially commercial real estate – is about data, data, data. As in, Really. Big. Data. And AI is owed a large part of the credit for that.

A dizzying amount of data is being crunched and sorted and searched by artificial intelligence-enabled tools that are changing how deals get done and who will still have a job in the future.

The promise of AI to use data to predict the future is massive – and it promises to do that with more accuracy and efficiency, greater productivity, and less cost for commercial as well as residential real estate.

So, what, exactly, can AI do for commercial real estate? Let’s break it down.

What AI is

To put it simply, artificial intelligence is what lets Amazon’s Alexa talk to you and cars drive themselves. Its algorithms use data to mimic human intelligence, including learning and reasoning. Then there’s machine learning, where algorithms analyze enormous amounts of data to make predictions and assist with decision making. We’re putting them both under the same AI umbrella.

There are four main areas where AI is remaking the commercial real estate industry: development and investing; sales and leasing; marketing; and property management.

Development and investing

With its ability to quickly analyze a staggering amount of data, AI lets investors and developers make better data-driven decisions. More responsive financial modeling helps identify ideal use cases and project ROI under multiple scenarios using real-time data. Pulling in alternative data – say, environmental changes or infrastructure improvements – goes beyond traditional data points and can identify investment opportunities, such as neighborhoods beginning to gentrify. In fact, alternative, hyper-local data has become even more important as COVID-19 continues to upend property valuation models.

AI’s crystal ball comes from recognizing patterns in the data and continuing to learn from new information. It can forecast risk, market fluctuations, property values, demographic trends, occupancy rates and other considerations that can make or break a deal.

And it does all of this more efficiently, more accurately and less expensively than manual methods.

Sales and leasing

There’s a big question looming over AI and automation: Will technology put real estate brokers out of business? The short answer is, “No, but brokers need to step up their tech game.”

Keeping up with – and being open to – tech trends is essential. Clients’ ability to use online marketplaces to search for or list property will only grow, but there still is no substitute for expertise and the personal rapport that builds trust. Chatbots can’t negotiate (yet). Robots can’t show a space and weave details about the property into a story. (If you want to know more about using storytelling in real estate, check out this great marketing guide.)

But Big Data is such a powerful tool that brokers need to know how to harness it for themselves. Having more, and more nuanced, data about clients and properties means brokers can better match the two. They can be more confident in setting sales prices and rental rates. Becoming a “technology strategist” to help clients design an automation strategy for a property would be a great value add to their services. Even just starting out with a website chatbot to answer common questions would add a level of tech-savvy efficiency to communication with clients and prospects.

Marketing

Also a boon of Big Data for brokers: more sophisticated, targeted marketing for themselves, as well as for client properties.

Integrating AI with customer relationship management (CRM) tools brings a richer understanding of clients and prospects that can make choosing marketing channels and personalizing targeted content more precise.

Then there’s data-driven lead scoring. Property intelligence firm Reonomy says its commercial data mine – 52 million properties, 100 million companies, 30 million personal profiles, and 53 million tenants – can be searched in multiple ways to create custom prospect lists. (Check out Forbes.com’s “5 Ways Artificial Intelligence is Transforming CRMs” for a fascinating list of what AI can do, including analyzing conversations for sentiment analysis.)

Property and facility management

The Internet of Things (IoT) is already helping property and facilities managers control and predict energy costs, as well as proactively address maintenance issues. Integrating smart technology like thermostats and sensors with AI also means more efficient space planning. Smart security cameras and wi-fi tracking can create “people heat maps” that can identify underutilized or overcrowded areas.

IBM’s TRIRIGA does that and more. Part of the Watson project, TRIRIGA offers AI-driven insights to show how people are actually using a space and ensure a company has the right amount of space in the right areas. It can also analyze common questions from a chat log, then use that data to create an AI virtual assistant to automatically answer those questions – and update itself as it learns new data. Maintenance requests, room reservations and more can be fully automated.

Strategic space planning has become even more important during the pandemic, as work-from-home trends and safety concerns reshape offices as workers return. (Need ideas for your office? IBM’s Returning to the Workplace guide might be a good place to start.)

Barriers to adoption

There’s no question tech-enabled commercial real estate companies will have a competitive edge. The question is, when will more of them agree enough to adopt AI more widely?

PropTech with and without AI has exploded over the past few years – and that’s part of the problem. In an Altus Group survey, 89% of CRE executives said the PropTech space needs significant consolidation before it can effectively deliver on industry needs; 43% said that is already underway or will occur within 12 months.

Then there’s the undeniable learning curve that comes with any tech tool – an investment of time as well as money. The survey also showed concerns about regulatory requirements for data collection and management, having enough internal capacity, and nonstandard data formats.

Despite those perceived barriers, there’s also no question that innovation and disruption from AI are moving at a dizzying pace – and that commercial real estate needs to keep pace.

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Real Estate Big Data

Supply crisis hits housing – starts and permits fell in September

(REAL ESTATE) New data from the Commerce Department shows a dip in permits and starts, but if you look closely, multifamily is carrying that weight, so how is single family production going?

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family in their living room with moving boxes during the competitive housing market

Last month, housing starts fell 1.6%, which is only a slight dip, but permits fell 7.7%, and the gap between units completed and those still under construction is the largest on record, according to reporting from the U.S. Commerce Department.

While starts and permits hit a year low and while labor shortages, supply chain issues, and rising prices of raw materials, it should be noted that single-family starts actually remained unchanged, and permits for single family homes only fell 0.9%, so what we’re looking at here is a slowdown in the multifamily sector as sales heat up in single family housing..

Another factor at play here regarding still-tight inventory levels is the federal mortgage forbearance program as a response to the pandemic. As the program wraps up, more inventory will come online.

Dr. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) explains: “The current mortgage default rate of at least three months is running high at 3.5% compared to less than 1% before the pandemic. However, foreclosures have been at historic lows so far due to the forbearance support. The default rate will certainly fall as long as the economy continues to generate jobs, but the end of the federal support program inevitably means some homeowners will need to sell. This will be another source of housing inventory.”

Because tight inventory levels have kept the market restricted and sales below what demand is, the residential real estate sector should see hope in this analysis.

But there is no sector safe from the supply chain crisis or prices rising again on raw materials. Reuters reports that many materials like windows and breaker boxes are in short supplies while the cost of building materials have surged, like copper which is up 16%, and lumber prices are jumping back up to record highs set in May.

Homebuilder confidence is up, according to the National Association of Home Builders (NAHB), but their most recent survey also indicates that “builders continue to grapple with ongoing supply chain disruptions and labor shortages that are delaying completion times.”

The Mortgage Bankers Association (MBA) reported today that mortgage applications for new home purchases are down 16.2% compared to September 2020, and applications are down 4% compared to August. It is notable that the average loan size hit $408,522, the highest on record, and another indicator of increasing construction costs.

Going forward, analysts expect the backlog of starts to continue as labor and supply chain issues persist. And although the news isn’t overtly positive, single family housing on its own is actually performing better than in 2020. There is light at the end of the tunnel for hopeful homebuyers.

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