The Rise of the $100K Renters and What it Means

The Wall Street Journal has an in-depth article about the continued strength of the rental housing market in America, which is related to the explosive growth in households that earn $100,000+ and rent their homes. From the article:

In 2019, about 19% of U.S. households with six-figure incomes rented their homes, up from about 12% in 2006, according to a Wall Street Journal analysis of Census Bureau data that adjusted the incomes for inflation. The increase equates to about 3.4 million new renters who would have likely been homeowners a generation ago...

It isn’t unusual for high-earners to rent in pricey coastal cities like New York and San Francisco, where sky-high real-estate prices have long limited homeownership. Yet these markets account for less than 20% of the new six-figure renters, according to the Journal’s analysis…

Why are high-income households renting at a higher rate? One reason is debt:

A $100,000 income is still comfortably in excess of the median U.S. household income, which was $63,179 in 2018, according to the Census Bureau. But many Americans these days are mired in debt. They have car payments, credit-card debt, health-care bills and college loans. Student debt is particularly vexing for the younger Americans who are starting families.

There is a connection between student loans and the housing bust, which isn’t lost on young home buyers. Many students took out loans because the housing crisis wiped out the equity in their parents’ homes that would have helped pay for college. Since then the amount of student debt outstanding has tripled, to more than $1.6 trillion. A couple of years ago Fannie Mae, the government-sponsored mortgage giant, made it easier for borrowers with higher debt levels to qualify for a mortgage, though recently Fannie tightened its lending standards.

These higher levels of debt also make it difficult for potential home buyers to save up for a downpayment:

“The lack of savings for a down payment in this country is grossly underestimated,” said John Pawlowski, a housing analyst at Green Street Advisors, who estimates that the typical renter’s net worth is about $5,500. “Consumer balance sheets are not good.”

Finally, new home construction has not kept up with demand so that creates the added pressure of rapidly increasing home prices, which for many people makes it more attractive to rent:

Jacob Neuberger, a 30-year-old who works in Denver for an investment firm, considered buying when he moved out of his one-bedroom downtown apartment. He and his girlfriend opted to rent a townhouse for $2,700 a month. The one next door sold for $550,000. Mr. Neuberger estimated that his costs to own would be about 20% higher than renting and that he would need the townhouse to appreciate by about 10% to cover transaction costs if he needed to sell to buy a bigger home or if he had to move for work. “The price appreciation can’t go on forever,” he said.

While this story is focused on high earner households it actually does a very good job of explaining what is going on in the housing market in general: not enough new housing supply + higher household debt + lower household savings levels + a tighter mortgage lending environment = many more renters (especially higher-income renters).

Comparing Cost of Renting vs Owning in Each State

HowMuch put together a chart showing the cost of renting vs. owning in each state and it’s interesting:

Our latest visualizations use data from the U.S. Census Bureau’s most recent American Community Survey to compare the cost of renting a home and owning a home in each state. To calculate the median monthly mortgage payment, we subtracted median housing costs of houses without mortgages from median housing costs of mortgaged houses. For median rent payments, we used contract rent, which is defined as the monthly rent for a home without including payments for utilities.

Source: HowMuch.net

One-Off or Early Signs of a Trend?

Those of us who were around pre-Great Recession can remember a time when it was relatively commonplace for apartment communities to be converted to condos. Then the mother of all recessions happened and rental housing became the most lucrative, and safest, real estate game in town and we stopped seeing those conversions – if anything we saw condos converting to rental units.

That’s what makes the news of this move in Winston-Salem pretty interesting. From a story in the Triad Business Journal:

Winston-Salem investors Ben Bloodworth and Taylor Williams purchased the 836 Oak Street Lofts apartments in downtown Winston-Salem for $2.75 million with plans to convert the 26 apartments in the former mill facility into condos.

The purchase included 1.22 undeveloped acres adjacent to the apartments.

Bloodworth told Triad Business Journal that all current leases would be honored, and the units would be upfitted and sold as the leases expire.

Downtown Winston-Salem is experiencing a boom of new housing, retail, restaurants and entertainment with the growth of the Wake Forest Innovation Quarter, including the Bailey Power Plant, and the office renovation projects at the GMAC tower.

Downtown Winston-Salem is a particularly hot market in the Triad right now, so this might portend a larger trend across the region, but it will be interesting to see if other investors follow suit, especially in the downtown markets of the Triad’s cities.

Home Sales Slump, Rental Market Rises

Home sales have slowed in recent months and according to this article in the Wall Street Journal, the culprits contributing to the slowdown in the for-sale market are rising prices, rising mortgage rates and the Trump administration’s tax bill that reduced incentives to own homes. That could be good news for the apartment industry:

Yet other analysts argue that all the gloom hanging over housing is good news for owners of apartments, like AvalonBay Communities , which is up 7.4% over the past six months, andEquity Residential , which has added 5.7% in that time. Rental-home companies have also gained, with American Homes 4 Rent climbing 3.8%.

“Having pressure on home sales is a positive for the rental side of the industry,” David Singelyn,  American Homes chief executive, told investors recently. “It should all fare very, very well for pricing power going forward.”

Source: Wall Street Journal

In fact, we could also see room for rents to rise in the near future:

Not only is the added cost likely to keep some renting longer, $135 is about 8% of the average monthly rent collected by American Homes, suggesting that there is room for these companies to raise rents and remain less expensive than comparable homes for sale, he said.

To that end, Freddie Mac said last week that about 78% of Americans view renting as more affordable than owning, a rise of 11 percentage points since the mortgage company released similar survey data six months ago. Freddie also said the proportion of respondents who said they have no plans to buy homes also rose.

More Good News for Multifamily: Spring Home Sales are Slow

Here at PTAA, we’re often asked why the apartment industry has continued to thrive despite historically low (now rising) interest rates, a strong economy and rising rents, and our answer is, “Well, there are a lot of reasons.” Many of those reasons are highlighted in this article about a lethargic spring home sales season in the US:

Instead, home sales are lackluster. That is locking many young home buyers out of the market when a good job market should give them the opportunity to purchase a first home. First-time buyers made up 31% of sales in May, down from 33% both the prior month and a year earlier, according to the National Association of Realtors. Mr. Khater said that is a missed opportunity for many millennials, who might find it hard to catch up, as prices are growing faster than incomes.

Supply is tight in part because of a lack of new-home construction caused by regulatory barriers, lack of available land, and labor and material shortages. Existing homeowners also have been reluctant to put homes on the market…

The situation could grow more challenging for buyers in the months ahead if mortgage rates continue rising. The average interest rate on a 30-year fixed-rate mortgage in May was 4.59%, up more than half a point from 4.03% in January, according to Freddie Mac.

At the same time, the median sale price for an existing home in May was $264,800, up 4.9% from a year earlier and a new all-time high, according to NAR. Prices have risen 71% from the low in January 2012…

Rising mortgage rates and home prices also help deter existing homeowners, many of whom enjoy historically low rates, from selling because the cost of purchasing a larger home is a significant jump from their current monthly payment.

 

 

Get Used to Those Boomers and Xers

Freddie Mac Multifamily has published research results showing that older adults are showing less interest in buying a home. From an article in NAA’s Units:

Specifically, the spring profile finds a total of 67 percent of renters view renting as more affordable than owning a home, including 73 percent of Baby Boomers (aged 53-71). Similarly, 67 percent of renters who will continue renting say they will do so for financial reasons—up from 59 percent just two years ago.

The survey finds half (50 percent) of Baby Boomers currently renting do not anticipate buying a home in the future, up eight points from the previous profile taken six months ago. Of that half, 35 percent have no interest in owning, and 15 percent say they will never be able to afford it.

Similarly, 31 percent of Gen Xers (aged 38-52) expressed that sentiment, up from 28 percent from the previous Profile. Of those respondents, 19 percent lack interest and 12 percent say they will never be able to afford it.

“Perceptions of affordability and cost continue to play an outsized role in the choices of America’s renters, as they overwhelmingly see renting as more affordable and the right choice for them – right now,” said David Brickman, Executive Vice President and Head of Freddie Mac Multifamily.

“Remarkably, half of Baby Boomers who rent do not anticipate owning a home in the future, with a growing number of Generation Xers following suit. Indeed, we are witnessing an historic shift in preference among older Americans, as they increasingly are choosing the size, convenience and affordability that renting offers over ownership.”

This trend could have an interesting effect on the amenities that apartment communities provide in the future…Crossfit might be replaced by pickleball!

What the Silver Tsunami Means for Apartments

An interesting article at Curbed looks at the impact that retiring baby boomers, aka the “silver tsunami”, are having on having on housing in America, including apartments.

The senior rental market is booming. Between 2009 and 2015, the number of renters over 55 increased by 28 percent, compared to a 3 percent increase in renters 34 years or younger, according to a 2017 analysis of U.S. Census Bureau data by RENTCafe. And the percentage of senior renters making $60,000 a year or more rose from 11 to 15 percent between 2006 and 2016, according to Harvard data.

This has created an opening for luxury urban living for seniors. A recent industry report by JLL, a global real estate firm, noted that more developers are focusing on urban infill projects to take advantage of this demand.

This is, of course, only a small slice of the senior market. There is also a sizable population struggling to pay rent: The U.S. serves only about a third of adults age 62 or older who qualify for housing and rental assistance. By 2035, there may be nearly 5 million eligible seniors who aren’t receiving aid, according to Jennifer Molinsky, a senior research assistant at the Harvard Joint Center for Housing Studies…

In many ways, the senior market is a microcosm of the housing market as a whole. While many developers rightly see potential in new high-end construction, there’s a huge demand for more affordable units that just isn’t being met yet.

 

Fewer Apartment Renters Looking to Buy

A recent survey shows that the percentage of apartment renters who aren’t interested in buying a house has recently increased. From the Wall Street Journal:

In all, 20% of renters said they have no interest in owning a home, up from 17% in August and 13% in 2016, according to results of a semiannual survey of renters by mortgage company Freddie Mac in January.

Two-thirds of renters who plan to continue renting said they are doing so for financial reasons, up from 59% two years ago, according to the survey.

 “Housing is becoming less and less affordable. Renting is perceived to be the more affordable housing option,” said David Brickman, an executive vice president at Freddie Mac and head of its multifamily division.
Here’s another interesting tidbit -Boomers have really lost interest in buying over the last two years:
The preference for renting is being driven in part by baby boomers, who are more likely to have experienced some of the pitfalls of homeownership. Some 35% of baby boomers said they have no interest in owning a home, up from 31% in August and 23% two years ago, according to the Freddie Mac survey.

The Stunning Growth of “Rentership”

Anyone paying attention to housing trends since the Great Recession would tell you that the number of rental households has increased. If, however, they aren’t a close observer they might be stunned at the sheer scale of the shift from homeownership to “rentership.” From the NAA blog:

In a study of the 100 largest U.S. cities, 22 shifted from owner- to renter-majority between 2006 and 2016, including key markets Chicago, San Diego, Detroit, Austin and Sacramento, boosting the total number of renter-dominated cities to 42.

Over the 10-year period analyzed, rentership growth outpaced homeownership in 97 of the 100 most populous cities…

During these 10 years, the total U.S. population gained approximately 23.7 million people, and at the same time, the number of renters increased by 23 million, and homeowners by less than 700,000.

U.S. Homeownership Rate Rises

It looks like the millennials are getting into the homeownership game, and that promises to impact the housing market in a big way if the trend continues. From the Wall Street Journal:

The U.S. homeownership rate rose in 2017 for the first time in 13 years, driven by young buyers who overcame rising prices, tight supply and strict lending conditions to purchase their first homes.

The annual increase marks a crucial turning point because it comes after the federal government reined in bubble-era policies that encouraged banks to ease lending standards to boost homeownership…

The homeownership rate rose to 64.2% in the fourth quarter of 2017 from 63.7% a year earlier, according to data released Tuesday by the U.S. Census Bureau. The share of Americans who own a home has been on the rise since the first quarter of last year, indicating a reliable upward trend.

The homeownership rate among households headed by someone under age 35 rose to 36% in the fourth quarter from 34.7% a year earlier. That was by far the largest increase of any age group during the period.

And here’s the paragraph that should catch every apartment executive’s eye, particularly the last sentence:

Now, the homeownership rate is rising again as millennials begin to embrace homeownership. In all, the U.S. added roughly 1.5 million new owner households in the past year. Meanwhile, the number of renter households declined by 76,000, the second consecutive quarter in which the renter population shrunk on an annual basis.

No doubt the apartment industry has been on a heckuva run over the last eight or nine years, but numbers like this must have some people wondering if the run is about to end or at least hit a serious plateau.