AgentRentals

Why renting is a growth opportunity for years to come

Homeownership continues multiyear decline as number of renter households hits 20-year high

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Takeaways:

  • The national homeownership rate fell for the 10th consecutive year in 2014, to 64.5 percent, while renter households rose to a 20-year high of 35.5 percent.
  • The mortgage crisis transformed approximately 4 million homeowners into renters.
  • For the foreseeable future, our country has a growing rental class, which is why we believe the single-family rental (SFR) market is a worthwhile, long-term investment.

Hardly a week goes by without another study or poll on what millennials will — or won’t — do when it comes to housing. Last year, the prevailing wisdom seemed to be that millennials were into sharing, not owning.

This year, if you listen to Fannie Mae and the National Association of Realtors, millennials want to own. However, they’re slower to buy than Gen Xers and baby boomers at the same age, primarily because they’re taking longer to settle down.

Frankly, I don’t know who’s right or who’s wrong when it comes to millennials’ aspirations. But as to why millennials aren’t buying homes now — and why they won’t be any time soon — I’ll paraphrase political commentator James Carville: It’s the economy, stupid.

Recently, there has been a spate of reports that seem to bear this out. According to The State of the Nation’s Housing 2015, a report released by Harvard University’s Joint Center for Housing Studies (JCHS), the national homeownership rate fell for the 10th consecutive year in 2014, to 64.5 percent, while renter households rose to a 20-year high of 35.5 percent.

Additionally, The Urban Institute projects that renter households will grow from 40.7 million in 2010 to 47.9 million in 2020 and 53.7 million in 2030.

What these studies are showing is that household formation is finally getting up to where it should be, but that the new households being formed are rental homes.

And millennials aren’t the only new renters in the market. The mortgage crisis transformed approximately 4 million homeowners into renters.

Yes, the economy is getting better, but despite what a small subset of coders from Silicon Valley and those in the Wall Street bonus pool might be experiencing, the economy is not booming.

According to the U.S. Census Bureau, more than 42 million Americans earn less than $50,000 — with 14.5 million of those earning less than $15,000.

Add to that slower wage growth, stricter mortgage standards and rents rising 4.3 percent annually, and it could take the average household 12.5 years to save for a 20 percent down payment.

Like it or not, there’s no question that there’s a growing wage and asset gap within our society. Also, many millennials have grown up watching their parents struggle with housing issues.

Many just don’t feel comfortable giving away their life savings or getting into even more debt to buy a home.

So, for the foreseeable future, our country has a growing rental class, which is why we believe the single-family rental (SFR) market is a worthwhile, long-term investment.

Single-family homes are gaining in popularity and are housing more than half the growth of renters from 2004 to 2013.

And they attract a variety of households — middle-aged, married couples with children, as well as married couples without children and single-parent families — because of their established educational, community and economic infrastructure, which is geared toward families.

These trends haven’t gone unnoticed. Companies such as Colony Capital and BlackRock have already jumped into the SFR market to provide asset-based lending, and hedge funds are buying up portfolios of 4,000-5,000 rental homes.

But despite these activities, there is still an opportunity for individual investors to take advantage of the SFR market.

And despite all the publicity surrounding institutional investors, more than 97 percent of the market is made up of smaller retail investors who tend to buy in their local market.

Of course, not everyone is inclined to be a landlord or can afford to buy a second home in the same neighborhood in which they live.

For smaller SFR investors looking to maximize their investments, companies can help by leveraging technology, data and industry expertise to select and acquire assets, as well as manage the properties for them.

Also, new lending options are providing more liquidity to this market. Now investors who don’t qualify for GSE loans or want to build portfolios with more than the nine investment mortgages allowed by the GSEs can turn to asset-based lenders.

These lenders have recently expanded into the SFR market and are making loans based on the ability of a property to generate enough income to service a loan.

JCHS projects that millennials will form more than 20 million new households between 2015 and 2025, most of which will be renter households, so the rental trend is here for the long haul.

If individual investors want to be part of this growth opportunity, they’ll need to find the right vehicle and process to take advantage of these economic trends.

Don Ganguly is the founder and chief executive officer of HomeUnion. Follow HomeUnion on Twitter.

Email Don Ganguly.