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).

Student Debt Impacted U.S. Housing Market

One of the demographic factors contributing to the continued strength of the apartment industry is that young adults are waiting longer than previous generations to purchase their first homes. One factor contributing to that wait is that many of them are carrying significant student loan debt. From the Wall Street Journal:

Homeownership among people ages 24 to 32 fell 9 percentage points, to 36% from 45%, between 2005 and 2014, the Fed said. While many factors affected the homeowner rate, the Fed said 2 percentage points, or about a fifth, of the decline was tied directly to student debt. That translated into 400,000 borrowers who could have owned a home by 2014 but didn’t because of student loans.

Source – Wall Street Journal

The article goes on to point out that the study period for these results (2005-14) corresponded with a sharp increase in student loan delinquencies, and that in ensuing years many borrowers have enrolled in plans that reduce their monthly bills, but there isn’t any hard data yet that shows the impact has been reversed completely.

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.

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!

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.

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.

Is Condo Conversion Early Sign of a New Trend?

Since the great recession the primary residential real estate story has been the conversion of, well, everything to apartments. Historic buildings, existing commercial, condos, etc.  We have not, however, seen any apartments converted to condos over the last 10 years, but that might be getting ready to change.

The Triad Business Journal reported that the Oak Street Lofts apartments in Winston-Salem will be converted to condos as existing leases begin to expire. From the story:

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.

Bloodworth said the one- and two-bedroom condos, each of which has a unique layout, is planned to sell for between $165,000 and $275,000.

“This is irreplaceable real estate and we are excited to offer these updated condos for sale at this price point,” Bloodworth said.

So is this the first indication that we might be seeing a shift in the local multifamily market? There’s no way to tell, but this 2011 article from Multifamily Executive might help explain why it’s worth watching:

But simple economics also points to an emerging cost-of-housing dichotomy that has traditionally been the undoing of the apartment operator: Rents are going up, and condo prices are coming down. If the cyclical nature of multifamily construction proves out, the endgame of that dichotomy means renters will slowly leave apartments to purchase condo units, and builders and investors will chase them down, attempting to convert rental buildings into condos along the way. 

Interestingly, the article, which was written just as the apartment industry was entering into its historic growth period, accurately predicted that a trend towards condo conversion wasn’t likely to happen in the near future. Seven years later, with the cost of ownership solidly below the cost of renting, we might finally see the chilling of the apartment market. But, given the fact that the apartment boom has consistently defied historic precedents over the last seven years that’s not a sure thing at all.

Surveys Say….People See Renting as Cheaper Than Buying

Recent surveys from Freddie Mac and NMHC had a few interesting findings. Probably of most import, Freddie Mac’s survey showed that an increasing percentage of renters perceive renting as less expensive than buying. From a Wall Street Journal article about the surveys:

A boom in apartment construction in the past few years has caused rent increases to begin to level off in many U.S. cities, while home price gains have accelerated over the past year. As a result, roughly 76% of renters in August said they believe renting is more affordable than owning, up from 65% in September 2016, according to survey results from Freddie Mac expected to be released Wednesday.

“We talk virtually every day about how renting is becoming less and less affordable. I think the answer is just that housing is becoming less and less affordable and renting is the more affordable of the two,” said David Brickman, executive vice president and head of Freddie Mac Multifamily.



Source: Wall Street Journal

One interesting insight from the NMHC survey is that more baby boomers than millennials cite costs of homeownership as a reason to rent:

The National Multifamily Housing Council survey found that baby boomers might be more likely than millennials to rent to avoid the costs of homeownership, perhaps because they have spent decades repairing broken dishwashers and replacing leaking roofs…

The survey found that just 7% of all renters 25 to 34 years old said they choose not to own a home because of the maintenance costs, while 28% of those over 65 years old cited that as the reason.

And this nugget of info might best explain why renting is preferred by an increasing number of folks:

The top reason renters across all age groups said they prefer to rent was convenience and flexibility, with 23% of respondents citing that as the reason…

18% cited lack of money saved for a downpayment as their reason for renting.

It’s definitely worth your time reading the full article; lots of insights into the factors underlying the continued strong rental housing market.

Number of Renters on the Rise in the Triad

The percentage of residents who are renters continues to rise according to a report from a company named Abodo, which is based on the US Census’ 2015 American Community Survey. At over 40% the rate is higher than the US average:

The report’s authors noted that nationwide, the number of renters is on the rise. In the U.S., 2015 saw 1.4 million new renter households, meaning 36.4 percent of residents now rent or lease their homes. The figure represents the largest number of renter households since the 1960s.

In the Triad, Greensboro has the largest percentage of renters at 45.6 percent. High Point follows at 44.3 percent while 40.2 percent of those living in Winston-Salem don’t own their properties…

Another interesting piece of info from the report: in renter-majority cities the average age of owners is pretty high:

The majority of renters in the 21 renter-dominated cities are under 44 years old, with the highest percentage (24.29 percent) falling between the ages of 25 and 34. Owners tend to be older — a whopping 77.16 percent of them are over 45.

Age Group Breakdowns in Renter-Majority Cities

Source Triad Business Journal

More Affordable to Buy or Rent in Guilford County?

The Greensboro News & Record has an article that looks at the cost of buying versus renting in Guilford County:

If all you care about is the bottom line, you’ll want to buy rather than rent a home in Guilford County. Renting just isn’t worth it.

That’s according to ATTOM Data Solutions, a top provider of real estate statistics. In a new report, the Irvine, Calif.-based company compared wages with rental rates and home prices in 540 counties across the country to answer this question: Is it cheaper to rent your home or buy it?…

In Guilford County, with 495,000 residents, the median cost of renting a three-bedroom apartment is estimated at $1,089 for 2017. The median home price in 2016 was $139,000. The average weekly wage here was $856 in the second quarter of 2016.

And ATTOM Data says it’s no contest: You’re better off buying a home because, under current interest rates, you’ll spend less of your income on a mortgage than rent.

As we’ve pointed out in the past, however, an equally operative question in this day and age is, “Can you qualify?” Thanks to the stricter lending standards it’s much more difficult to qualify for a loan these days than it was in the pre-Great Recession world, so even if it is less expensive to be it’s just not possible for many potential home buyers.

There’s also an increasing likely probability that the gap between renting and owning is going to shrink in the near future. The home construction market is constrained, especially at the entry level end of the market, which means prices will go up as millennials (finally) start looking to buy in significant numbers. Add to that the predicted interest rate increases over the next year or two and that affordability gap could close quickly.