Last week, housing-data giant RealtyTrac® released an analysis of fair market rents and median home prices in more than 500 U.S. counties, which shows that buying is still more affordable than renting in the majority of U.S. housing markets. While this offers positive news for the housing industry, the report also reveals that the opposite is true in markets with the biggest increase in the millennial share of the population over the last six years—which begs the question: Where does the future of homeownership stand among the younger generation of first-time homebuyers?
In an interview with RISMedia, RealtyTrac Vice President Daren Blomquist, says this latest report tells us that “we’re not going to see those potential first-time homebuyers become homebuyers in the near future in great numbers because the markets they’re attracted to, largely for jobs, are unaffordable. These markets have high rents and even more expensive homes. I think this shift toward more of a ‘rentership’ society is not just a one- or two-year trend, but will be a multi-year trend.”
For the report, RealtyTrac analyzed 2015 fair market rental data recently released by the U.S. Department for Housing and Urban Development for three-bedroom properties in 543 counties nationwide with a population of at least 100,000. In the 473 counties with sufficient rental and home price data, the fair market rent for a three-bedroom property in 2015 will require an average of 27 percent of median household income, while buying a median-priced home requires an average of 25 percent of median household income based on the median sales price in November.
Buying a median-priced home was more affordable than renting a three-bedroom property in 68 percent of the counties analyzed, representing 57 percent of the total population in those counties.
But in the 25 counties with the biggest increase in millennials between 2007 and 2013, fair market rents for a three-bedroom property in 2015 will require 30 percent of the median household income on average, while buying a median-priced home requires 36 percent of median household income on average. For the analysis millennials were defined as anyone born between 1977 and 1992.
According to Blomquist, first-time homebuyers are stuck between a rock and a hard place, where they often can’t afford to live where they work. “At a macro level, millennials are moving to where the jobs are within a metro area, and also moving to the more urban parts of those areas, not only for jobs, but for the type of neighborhood and amenities that are attractive to them,” says Blomquist. “The big question is, if and when will they make that transition to the home with the white picket fence.”
Given the lessons of the past, however, a more balanced approach to homeownership may be in order, explains Blomquist. “A lot of people keep looking at the need to get homeownership back to where it was—I think we’re getting back to where it should be,” he says. “We’re coming off a period where homeownership was too high and it’s painful for people whose expectations were tethered to homeownership being close to 70 percent. Many younger folks will eventually become homeowners, but not all, and not in the numbers we saw in Generation X.”
In the meantime, Blomquist is witnessing brokerages in areas with high fair market rents shoring up their property management divisions to capitalize on the rental boom. “I don’t think one size fits all, but if (property management) is a piece brokers can incorporate into their business models, it certainly can be extremely beneficial.”
And, for those brokers and agents in the 68 percent of counties where buying is more affordable than renting, there’s a great message to deliver. “To millennials in these areas, you have to say in a credible and low-pressure way, ‘here are the numbers—I’m not just saying this because we want your business,’” advises Blomquist. “The more cold, hard facts you can present to millennials, the better, as opposed to just your opinion.”
Current rental trends also present a prime opportunity to promote real estate as an investment for well-off millennials. “Another message to deliver is, you may not want to become a homeowner or tied down to a home, but as you’re getting your first good-paying job, a great way to invest money is to buy property as rental,” suggests Blomquist. “This is a really good time to be a landlord because of the dynamics of the market. It’s a great way for millennials to build wealth.”
Moving forward, Blomquist believes it will be important to maintain an optimistic yet realistic approach to the real estate market. “To a certain extent, the great recession is going to continue to have an impact. Homeownership has lost some of its luster—that doesn’t mean it’s going to go away, it’s just probably not realistic to expect it to return to what it was five or six years ago. Homeownership rates will probably settle in the 60-65 percent, and that might be a good thing. Eventually, things will return to a more normalized pattern, but it will take a few years due to a combination of delayed homeownership for some millennials and the trickling in of displaced homeowners who lost their homes during the crisis.”
Looking ahead, Blomquist promises even more usable research from RealtyTrac in 2015. “We’re trying to shed light on the market from a very data-driven perspective and we will continue to do that, including in new areas we haven’t touched yet in terms of data. Also, in the spirit of the market that’s no longer tied to the housing crisis, we’re going to have fun talking about housing, looking at new opportunities and angles that may be beneficial to buyers, sellers and brokers.”
For a full report and regional breakdown of the above report, please click here. For an interactive visual, visit: https://public.tableausoftware.com/views/2015FairMarketRentAnalysis/Dashboard1?:embed=y&:display_count=no. For a YouTube Video: http://youtu.be/BXwhGlyeDR0