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Renting Is the New Owning

Anyone who has a passing knowledge of residential real estate knows that prices are high and continue their march upward. So there is little wonder that renting has become the preferred means of housing for many. This shift is due to many factors including changing demographics, cultural evolution and the economic realities of the early 21st century. Groups that typically are thought of as home buyers are, today - like never before - opting to become long-term renters.

Affordability and a graying population are driving this trend, and the smart money is following it.

Who’s renting? It’s not who you think.

In the past when folks thought of the rental population, they thought of young people or those of scant economic means.

That made sense.

Most 20-somethings either don’t have families or are just starting them. Furthermore, most young people are new to the job market and are generally paid less than their more experienced co-workers. Most importantly, they haven’t had time to sock away money for the hefty down payment usually required to buy a home.

Many people of modest means, like younger families, simply don’t have the money for a 20% down payment. Couple that with monthly mortgage and property taxes, and their payments can be quite high.

The economics of home buying today find that it’s not just young and low-income people who can’t afford to buy a home. Increasingly it’s the middle and upper-middle classes that are having difficulty doing so. As a result, they too are choosing renting over owning. 

In addition, generational demographics – like the large numbers of Baby Boomers retiring – are driving many older people to opt for renting, despite their often being thought of as the bedrock of home ownership.

 

Why older Americans are turning to renting instead of home ownership

The massive Baby Boom generation – those born from 1946 through 1965 – are moving in great numbers towards their retirement years. Half are already over 65 years old. The Baby Boomers remain the largest demographic group in America.

Whatever “The Boomers” do has a tremendous impact on the country. The fact that many are now becoming renters is changing the nature of the residential real estate market. According to a study by RentCafe, an online real estate renting portal, people over 60 years old are the fastest growing population segment in the rental market. Over the past ten years, the number of 60+ year old renters increased from 6.5 million to 9.4 million. That’s a whopping 43% increase.

This shift has surprised many. It shouldn’t. Many in or approaching retirement are “empty nesters.” Their children are grown and have left to start their own lives. Increasingly, older couples find they don’t need a large house. Down sizing makes a lot of sense. Instead of buying a smaller house, renting an apartment appeals to many because there are fewer hassles and expensive maintenance issues to contend with. But its not always age or the size of a home driving Americans into the rental market. It’s money.

 

Affordability impacts other age groups and social classes

America is currently experiencing one of the longest economic expansions in its history. Unemployment is currently at a 50 year low. An increasing number of people have moved up into the middle class. This increased economic activity has fueled a rise in home prices. In some areas, prices have doubled over the past ten years.

What isn’t increasing however – at least not as fast – are incomes. Home price increases have far outpaced increases in wages and salaries even among those in the upper-middle class. In many areas, particularly on the West Coast and in Washington State, affluent households are having a hard time affording a home.

This wage stagnation has perplexed many economists who note that during most economic expansion’s wages increase and keep pace with economic growth. That’s not happening in this expansion. While wages have been on a slight uptick recently, it still isn’t enough. Until wages catch up with home prices, home affordability will remain an issue and force many into the rental market.

 

A cultural shift: the new “American Dream” sees Millennials forgo home purchases

Home ownership is as American as apple pie. It’s part of the American DNA. Few cultural values are as intrenched into the American psyche as owning a home.

Among emerging generations however, this American Dream is changing. Just as Baby Boomers embraced values and behaviors their parents often found perplexing – long hair, loud music and a general anti-establishment world view – so Millennials reject many of the values of their parents. Millennials don’t see home ownership the same way their parents do. In fact, to many of these young people, renting a home is preferred to owning one.

According to a study conducted by ValueInsured, a mortgage and financial services company, only 48% of Millennials (ages 21 to 36) found home ownership a good investment. That contrasts sharply to a previous high of 77% two years prior. The often sited reason was that home prices are too high. As a result, many Millennials are quite happy renting and plan to do so for the foreseeable future.

 

Follow the money: Real estate investors put funds into rental properties

As with any successful business venture, the smart money follows popular trends. Those trends clearly point to a significant shift towards renting. And the numbers confirm this. They tell a story – backed by empirical statistical and demographic data – that clearly indicates that real estate investors should be allocating more resources towards rental properties.

A number of investors already are. Many of them – both individuals and institutions – are pouring money into rental properties. However, they do have a challenge, and that’s finding good rental properties to buy. Some of these investors are new to the rental segment and need help. It seems there aren’t enough brokers and agents familiar with the rental property market to advise and direct them – at least not yet.  

 

Brokers and agents should follow the money too

Because there are so few brokers or agents targeting the rental investor market - particularly in the greater Seattle area - it is a wide open opportunity. Moreover, brokers and agents can learn the fundamentals of the rental investment property market pretty quickly. It’s not rocket science. Those who are familiar with their local residential real estate market will find switching to the rental segment very easy indeed.  

A company called RealPeek, www.realpeek.com , provides the broker/agent community with the tools and knowledge needed to become an expert in the residential rental field. Importantly, agents who leverage RealPeek’s data can provide their clients with useful, real-time search and advanced AI analytics. This unique database has filters that search based on cash flow, cap rate and rent-to-value projections. These are the metrics that save investors time and allow them to weigh a property’s various ROI scenarios.

With home ownership affordability remaining an issue for the foreseeable future, and older Americans opting in greater numbers to become renters, a move into the residential rental real estate segment seems like a sure bet.

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