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Young Adults Shift Toward Renting Rather than HomeownershipNearly four years into their post-college careers, 38% of the class of 2010 are working jobs that do not even require a high school diploma, much less a college degree.  Is it any surprise that millennials are the most frugal and fiscally conservative generation since the Great Depression?

A recent survey by the Union Bank of Switzerland (UBS) shows that only 12% of American millennials would invest unexpected income into the market.  Similarly, the majority of millennials report that the best financial advice they ever received was to save money (versus other generations, who valued investment advice much higher in the survey).

Is it a shock to anyone that the homeownership rate among them is dropping?

In the fourth quarter of 2013, the homeownership rate among adults ages 18-34 was 36.8%, down from 41% in the same period in 2007.  And the stats just get gloomier from there: among 35-44 year-olds, the homeownership rate was down to 60.9% at the end of last year, compared to 67.2% in 2007.  The trend is also visible in the shrinking percentage of first-time homebuyers, as younger adults continue to shy away from real estate; first-time homebuyers made up only 27% of all real estate purchases in December according to the National Association of Realtors, whereas the long-term average is 40%.

First-time homebuyers are an important barometer for the real estate market, as they add to the overall pool of demand for on-sale real estate.  Because they are not simultaneously selling a property, only buying, they add only to the demand side without adding to the supply side, so a growing proportion of first-time homebuyers tends to indicate growing prices.  

So what does all this mean for real estate investors?

First, it means the high demand for rental properties is likely to continue.  The rental vacancy rate in the fourth quarter was the lowest since 2001, at 8.2% according to the above Census Bureau’s data.  Young professionals will largely continue to rent homes through their twenties, rather than rushing to buy.

That is good for rents remaining high, but tough for landlords looking to sell their rental properties to first-time homeowners. 

It also means that some homeowners with large suburban homes may have difficulty as well, given that rents in higher-priced areas often fail to cover the ownership and management costs.  Pricing in these neighborhoods is “retail” because nearly everyone there bought as a homeowner, rather than the pricing being “wholesale” in areas where it is mostly investors buying and selling homes to each other with a needed profit margin.  Selling and leasing out vacant properties in these primarily retail-priced areas may continue to be difficult, although prices are expected to rise this year, if not at the same pace they did in 2013.

 

Image courtesy of The Wall Street Journal's Marketwatch
Homeownership Rate Changes by Profession

Still, as these millennials grow older, many will look to leave their cool urban digs and seek more traditional suburban homes to raise their children in, and many will still want to lease rather than buy. 

 

The employment landscape also looks different today than it did before the recession: of the estimated 8.7 million jobs recreated since the recession’s darkest days, a full 65% of them are low-wage, low-skill, often part-time jobs.  Contrast that against the jobs that were lost during the recession, of which only 40% were classified this way.

Similarly, the homeownership rate among different professions has changed.  Trulia recently mined Census Bureau data to compare the homeownership rates between different professions, and of the professions examined, only one has increased in their homeownership rate: construction workers.  All other professions, shockingly including real estate agents, legislators and executives, saw their homeownership rates decline.

It will be a long time before America’s love affair with homeownership reaches its pre-recession passion.  In the meantime, real estate investors should keep an eye out for properties that speak well to young professionals and young families in particular, because younger adults are in no rush to sign settlement papers on a new home.


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