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Real Estate Big Data

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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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.

renting

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.

home-price-expectations

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.

single-family-rentals

“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.

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Real Estate Big Data

NAR Chief Economist predicts housing market uncertainty

(BIG DATA) Warning bells on the housing market have been ringing for over a year. While this prediction isn’t a surprise, it’s disappointing news.

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Multitude of colorful homes representing housing market.

The housing market is booming. Many experts are concerned about another bust like we experienced in 2008, but the conditions are much different today. Homeowners aren’t extended like they were when the market crashed in 2008. National Association of Realtors® Chief Economist Lawrence Yun suggests that the housing market is still uncertain, even though he says, “housing kept the economy afloat” during the pandemic.

What is impacting the housing market? 

Yun cites record-low inventory and inflation as “curveballs” to the housing market. Many economists, including Yun, have been concerned about low inventory for many years, especially in certain markets. Even though builders are working hard to construct new residences, supply chain and labor issues are not accelerating the process.

Yun is more concerned about inflation impacting the housing market. He says,

“wages have risen by 6% from one year ago…but inflation is 8.5%.”

Rising mortgage rates have made mortgages cost $300 to $400 a month more, according to Yun. Many working families can’t afford that. Yun predicts inflation is going to be high for several months. The market will slow as the Federal Reserve raises rates.

Yun also cites the Russia-Ukraine war as another contribution to the uncertainty of the market. The war is also driving inflation, not just overseas, but in the United States. With gas prices climbing higher each week, this is impacting the housing market.

Is real estate a good investment in this market?

Last year, when Yun opened the Residential Economic Issues & Trends Forum at NAR’s annual REALTOR® Conference & Expo in San Diego, he expected the “housing sector’s success to continue,” but he did suggest that 2022’s performance wouldn’t exceed 2021s.

“Rising rents will continue to place upward pressures on inflation,” he said. “Nevertheless, real estate is a great hedge against inflation.”

There’s a lot we don’t know about the future. It’s disappointing to think that the housing market may be uncertain, but real estate is still a good investment.

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Real Estate Big Data

Housing starts stagnate, market conditions are rapidly shifting

Housing starts for April stagnated, marking the second consecutive months of declines, and more renters being left out of this shifting market.

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Housing starts stagnated in April, down 0.2% from the prior month, according to the U.S. Commerce Department.

The sentiment appears to be that although this marks the second straight month of dips, most are seeing today’s news as a positive, especially as construction of new homes was expected to fall 2.4% in April.

Further, housing starts are up 14.6% from April of last year, driven primarily by multifamily construction.

But it’s worth not getting overly excited, given that permits dipped 3.2% in April which is a forward-looking indicator, so expect starts to continue cooling in a time where we quite need the inventory.

Demand for housing inventory remains high, but the National Association of Home Builders reports today that confidence in the single-family housing market fell dramatically in May, marking the lowest level in two years.

Dr. Lawrence Yun, Chief Economist at the National Association of Realtors said in a statement, “The worst of the housing shortage is ending, but market equilibrium between supply and demand is still some ways off.”

He notes that as mortgage rates increase, builders “are chasing rising rents, with fewer homebuyers and more renters being forced to renew their leases,” noting that even prior to the interest rate increases, rents were rapidly rising and vacancy rates rapidly declining.

Pointing to another market shift, Dr. Yun notes that “Some degree of a return to the office is also fueling back-to-city living where high rises are concentrated.”

That’s a problem.

“Even as home sales look to trend back to pre-pandemic levels after the big surge of the past two years,” concludes Dr. Yun, “inventory will not return to pre-pandemic conditions. That means home prices will get pushed even higher in the upcoming months, albeit modestly, given the supply-demand imbalance.”

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Real Estate Big Data

Home prices jump double digits in majority of American metros [report]

(REAL ESTATE) Housing affordability was already a widespread challenge before current economic pressures were applied, but now home prices are skyrocketing.

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homeownership home prices

As home sales slide and mortgage rates rise, home prices in 70% of 185 measured metros saw a double digit annual increase in Q1, according to the newest data from the National Association of Realtors (NAR), up from 66% in the previous quarter.

The Southern region accounted for 45% of home sales in Q1, and experienced a 20.1% increase in annual home prices (compared to 14.3% just the quarter prior). Home prices in the Midwest jumped 8.5% annually in Q1, while The Northeast rose 6.7%, and the West increased 5.9%.

The median sales price of a single family existing home has now hit an astonishing $368,200.

“Prices throughout the country have surged for the better part of two years, including in the first quarter of 2022,” said NAR Chief Economist, Dr. Lawrence Yun. “Given the extremely low inventory, we’re unlikely to see price declines, but appreciation should slow in the coming months.”

Yun expects supply levels to improve, and for “more pullback in housing demand as mortgage rates take a heavier toll on affordability,” given that “there are no indications that rates will ease anytime soon.”

At first blush, price appreciation sounds lovely to anyone that owns a home, given that it is the largest investment most Americans will ever make.

But regarding today’s report, several homeowners told us that they now feel trapped, and that if they sold their current home, even if they purchased a new house at that same price, they would likely have to downgrade.

Affordability is an ongoing problem weighing down the housing sector. NAR reports that the monthly mortgage payment on a typical existing single-family home with a 20% down payment rose to $1,383 (up $319, or 30%, from one year ago). Families now typically spend 18.7% of their income on mortgage payments (but only spent 14.2% one year ago).

“Declining affordability is always the most problematic to first-time buyers, who have no home to leverage, and it remains challenging for moderate-income potential buyers, as well,” Dr. Yun observed.

Map of how home prices are behaving nationally

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