Oct272014

Young renters see little or no reason to buy a house

With high prices, a perception of high risk, and little appreciation potential, many young renters see little reason to buy a house.

rent_not_for_losersPeople can obtain shelter in one of two ways: they can rent, or they can own. Each method of possessing real estate has its advantages and drawbacks, and the rent versus own decision is never clear cut. Much of the work I’ve done with the display of property information on this site is to help people gain clarity on the financial implications of renting versus owning, but there are intangible, emotional issues that may tilt the balance one way or another.

The primary emotional draw of ownership is the sense of permanence. Ownership is primal; in fact, the first two words in any language are “no” and “mine.” Owning a home — having something each person considers “mine” — is deeply embedded in our being.

The housing bust deeply impacted people in a way economists can’t grasp with their macro-economic models; people no longer feel certainty that owning is stable and permanent. The Millennial generation, the generation that witnessed the housing bust but were too young to participate, the Millennials don’t view housing as the bedrock of their lives, and they correctly perceive the enormous weight imposed by a mortgage. To Millennials, the debt is large, real, and permanent, whereas the house is transitory, a complete reversal from the attitudes of previous generations.

Given this major change in emotional associations with home ownership and debt, it shouldn’t be surprising that the generation riding in the wake of the housing bust is opting to rent rather than rushing out to buy overpriced houses and bail out the previous generation from their foolish follies.

No Picket Fence: Younger Adults Opting to Rent

By DIONNE SEARCEY, OCT. 22, 2014I_rented_housing_bubble

… “That generation of folks has seen people really get hurt by homeownership,” said Mr. Solomon, president of the company, which is based in Waltham, Mass. “The petal has really fallen off the rose as it pertains to homeownership. People don’t want to be tied down to a mortgage they can’t get out of quickly.

”That is true of Cabell Dickinson, 30, who had rented an apartment in Arlington, Va., for eight years when she and her boyfriend decided in May to get more serious about their relationship. Instead of marrying and buying a home, however, they followed friends to Mr. Solomon’s complex, known as Halstead Square, moving into a $2,000-a-month apartment.

Right now, homebuilders and consultants to the homebuilding industry blithely assume the next generation will move out of their parent’s basements, get married, and buy homes — at least that’s the narrative. But what happens if Millennials don’t buy homes? Examples like the couple above are horrifying to some because if a significant percentage of the upcoming generation chooses to rent, homebuilding will languish, the home ownership rate will remain near the 64%, and the home price appreciation that enriched the Baby Boomers will not materialize for subsequent generations.

I once asked what happens if the next generation doesn’t buy the Baby Boomer’s houses. This fact will force Boomers to do one of two things: (1) sell for less than they want and potentially put too much supply on the market, or (2) spend several more years wandering around their empty McMansions. Realistically, most will stay put if they can’t sell for what they want, particularly here in California where Proposition 13 limits their mobility. In short, desperate Baby Boomers need Millennials to buy homes.

They often watch football in the lounge and have friends over for barbecues around the rooftop grill. “I can pretty much do my whole life in the building,” Ms. Dickinson said.

The developer’s bright red and yellow rental high rises — three already filled with young tenants — are a modern mix of glass, metal and fashionable ipe wood. The complex has fire pits and waterfalls, and each unit has a built-in iPod docking station hard-wired to speakers that pipe music throughout the apartment and link to TVs. When a fourth, 200-unit building is finished next year, it will have a residents-only bowling alley.

The Irvine Company has high rents, but few complain about the quality of the properties or the package of amenities. Renters in their communities have a high quality of life.renting_is_better

Since 2008, the year Lehman Brothers collapsed and home prices dropped precipitously, there has been a steady increase in the number of people ages 18 to 34 renting instead of buying homes. About 875,000 more households are now made up of young adult renters than would have existed if the 2008-era trend had held steady, according to an analysis of census data by Jed Kolko, chief economist at Trulia, a real estate marketing website.

This is what worries everyone dependent upon this next generation of buyers. Is this pent up demand, or demand which never materializes?

Moreover, as the economy slowly improves and job growth picks up steam, the millions of 20- and 30-somethings who shared living quarters with friends or nestled in their parents’ basements to ride out the economic shock waves from the Great Recession are beginning to branch out on their own. …

They’re not going to go from living with their parents to buying a home,” said Mark Zandi, chief economist at Moody’s Analytics, speaking at a housing conference in Washington. “They’re going to rent an apartment.”

Mark Zandi is usually wrong, but this time, he is right. The data clearly shows a higher percentage of this generation is choosing to rent.

“Our problem in the next three to five years isn’t a surfeit of multifamily housing but a shortage,” Mr. Zandi said. …

Here is where Mark Zandi is wrong. Providing real estate supply is a slow process, and builders and developers often take two or three years before they can respond to a signal from the market. Further, when new supply is added to the market, the impact is not immediate, so invariably builders and developers continue providing more units long after the opportunity is exhausted, the market gets overbuilt, and it takes several years for the market to absorb the glut of supply.forget_renting_nightmare_alley

Does anyone remember watching that play out with the housing bust? Why would apartments be any different? Personally, when I read reports like this one, and when economists tell me how demand will continue forever, I perceive a contrarian signal of overbuilding in the apartment market.

“What we’ve seen in this demographic is they are really looking for a Four Seasons level of service but without ever looking up from their iPhone,” Mr. Solomon said.

The buildings’ lobbies are scented with a white tea and thyme fragrance. Residents can play a round of virtual golf in the 24-hour gym or go to Zumba and Brazilian Butt Lift classes on the basketball court. They can watch movies on plush couches arranged in stadium seating or let their dogs roam in a small dog park. The complex hosts wine tastings and cooking classes in common areas.

“Everyone gets together around the pool and plans for the rest of the night,” said Gabriela Gomez, 36, who pays about $1,400 for her studio apartment.

Ms. Dickinson, who moved in with her longtime boyfriend, said she expected to eventually put together a down payment so she could emulate her few home-buying friends.

But she is in no hurry. …

And since the new mortgage rules provide a great level of price stability, she has little worry that her foolish friends will use Option ARMs to bid up prices so high she gets priced out until the next housing bust.

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[listing mls=”OC14148111″]