Millennials doomed to pay rent for life to Baby Boomers
If Millennials chose a lifetime of renting over owning, they may pay that rent to fund the retirement of a Baby Boomer.
My parents are Baby Boomers. Five years ago, I convinced them to retire part-time in Las Vegas and purchase as many rental homes as they could. Their retirement plan depends on renters for income, and many of those renters are Millennials.
My parents aren’t unique among Boomers. They both worked for the school system and made a modest but comfortable living up through their early retirement at 62. They fit the profile of a typical mom-and-pop rental property investor: they were older, established, and had enough savings and income to complete the deal. Most people that fit that profile are Baby Boomers, so when the housing crash presented so much opportunity to so many, Baby Boomers were bound to end up owning much of it.
Right now the biggest group of renters is Millennials, and this group is growing, which is one of the reasons the homeownership rate continues to decline. Will they be doomed to pay the retirement income to Baby Boomers? Perhaps, if that is their choice. The Millennials already fund the social security benefits the Boomers will enjoy, so what’s a little more on the rent as well?
The foreclosure crisis turned America into a market of renters—and rent collectors.
Patrick Clark, Suzanne Woolley, August 4, 2016 — 3:00 AM PDT
Pete Pollinger and his wife, Julie, … are joining the ranks of what Redfin Chief Executive Glenn Kelman calls Landlord Nation, a group of mom-and-pop investors who have seized on low mortgage rates and robust rent growth to plow savings into rental properties. Together, they’ve lifted the percentage of single-family houses used as rental properties to stratospheric heights, even as many would-be first-time home buyers struggle to reach ignition.
The number of starter homes on the market dropped by more than 44 percent from the first quarter of 2012 to the first quarter of this year, according to research published by Trulia. With entry-level homes in short supply, median prices in the category increased by nearly a third.
Entry level supply is short because prices were reflated back to peak values in many markets. Unfortunately, the peak value in many markets can’t be financed with conforming loans, which means buyers must have 20% down. Most don’t.
The share of single-family homes used as rental properties, meanwhile, has surged to a 30-year high, according to a Zillow analysis of data from the U.S. census. …
“If credit is tight, it doesn’t matter if it’s also cheap, because the people who can get it don’t need it,” Kelman said. “The haves in our society are renting homes out to have-nots, and they’ve been able to do that at increasingly high rents.”
Is this relationship exploitative? That is what Kelman’s statement suggests. The price in the market is what it is. You won’t hear any complaints when rents decline in the next recession.
The seeds of Kelman’s Landlord Nation were planted in the boom times before the last recession, when easy credit helped millions of Americans buy their first homes, pushing home ownership rates to all-time highs. Then the housing bubble burst. Rampant unemployment and exploding interest rates pushed millions of homeowners into foreclosure, creating a ripe patch of cheap housing for would-be landlords—and a new pool of renters to absorb the supply.
Wall Street firms, among the first to recognize the opportunity, poured billions of dollars into single-family homes. But by 2014, rising home prices led the largest single-family investors to scale back the pace of acquisitions and, in time, to start selling off homes to trim their portfolios.
Now smaller landlords are emerging in Wall Street’s wake, taking advantage of low mortgage rates and steady rent growth, as well as property management infrastructure built to serve the larger investors. …
“It is easier to be a landlord now than it has ever been in the history of the U.S.,” Cisterna said. …
That doesn’t make rental properties a sure thing—far from it, said Lewis. Unlike an investment-grade bond held to maturity, a rental home provides no guarantee that an investor will even earn back his or her principal. Renting out homes is also complicated from tax planning and property management perspectives, said Jon Strandlie, a financial adviser with Edward Jones in San Antonio, Texas.
Cashflow property investing is generally low risk. The risk to original capital is low. Anyone buying a property with good cashflow is already paying a low price, so it’s unlikely prices would fall catastrophically for those properties. Most likely, the investor in a cashflow property could sell at any time after 2 or 3 years and recover the original investment, cash or financed.
The risk with cashflow properties is that they won’t cashflow as expected. If these investments have a weakness it’s that most people overestimate how well they actually perform, particularly if the expectations were set poorly by an overly optimistic financial proforma.
It’s too simple to say that the influx of new landlords has been a bad thing for home buyers, said Svenja Gudell, chief economist at Zillow. When banks were hesitant to lend, cash buyers helped resuscitate comatose markets. Even now that investors are competing with would-be buyers, it’s not clear to Gudell that they’re taking precious housing stock off the market.
“We can all agree that there aren’t enough homes to buy, but if you look at rental rates, you can also say there aren’t enough homes to rent,” she said.
Housing is scarce on both the rental and the resale side in many markets, which is why so many put 50% or more of their income toward housing costs.
At the same time, the share of U.S. households that rent is at its highest level since 1965, leading Redfin’s Kelman to wonder whether the growing class of new landlords has wrought permanent change on the country’s housing market.“The interesting thing to me is that when investors were buying up property in 2011 and 2012, there was all this anxiety about what will happen when they sell,” Kelman said. “Now everyone is surprised to find out that they’re not flippers, but given where rents and mortgage rates are, it makes sense. We may have to acknowledge that there’s only one shoe, and it dropped in 2011.”
The investors who bought in the bleakest hours of the housing bust will sell some day, but they will not all sell at the same time, and they will not necessarily turn the houses over any faster than owner-occupants would. The average owner-occupied home turns over every seven years. I wouldn’t be surprised to see the holding time on many of these rental properties going much higher than seven years. In fact, if the shortage of housing persists beyond peak pricing, the removal of supply by investors may be another culprit.