I follow housing trends. I used to follow homebuilding, but now I follow housing. It’s a little like saying I used to follow Global Warming but now I follow Climate Change. Here’s why—Millennials. Today there are 9 million more renters than just a decade ago. That is a ton, but what really caught my eye was that 1 in 5 of the 43 million renters are now paying more than 30% of their income on rent alone. Some pay 50%. If you read the graph below you will also find out:
–49% of all renters are cost-burdened—they pay more than 30% of their income on rent.
–Home ownership is at its lowest rate in 50 years.
–Demand for apartments is still ahead of supply.
Despite all this, rental occupancy is at an all-time high. Sound crazy? It is. Raising rents and lower incomes is an unsustainable combination–something will have to give. Salaries will need to increase, or more likely, we will see demand for less expensive multi-family units rise. At these apartment prices, and as millennials get older, I believe home ownership will start to increase.
Developers must look at long term demographic trends and design to the need, years in advance. As these kinds of statistics come out, they pivot and start looking for sites that would be able to provide housing for less expensive rents. Today, that might include buying Class B and C properties and renovating. Buying less expensive land (farther from the city center) is another option but then Millennials love the Live, Work, Play environments.
Investors and Developers who can navigate all these conflicting issues will be successful.
In the market I know best, Arizona, millennials account for 21.6% of the population, and growing 11% over the next 5 years. The cost of renting an apartment in certain submarkets has already begun to exceed the cost of buying a home. The rise in renovations of existing Class B and Class C properties located in millennial hotspots is coming, however developers are projecting rents just below Class A rents, which will not solve the real issue – affordability.
–Cost burdened rent is unsustainable.
–More supply of affordable apartments is coming.
–Home ownership will make a comeback.
–And people want to live close to where they work.
P.S.- How do you handle rejection? We discuss this concept with Michael Kosta in this week’s video. Our motto? Fail Forward. Click here to watch now.
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Housing’s New Crisis: Half your income for rent
December 9, 2015 12:50 PM
A quarter of all renters, or 11.4 million people, now pay half their incomes on those monthly bills, according to a new study.
There are now 9 million more renters than there were just a decade ago, the biggest jump in renters on record, and they are paying more for rent than ever before.
“The crisis in the number of renters paying excessive amounts of their income for housing continues, because the market has been unable to meet the need for housing that is within the financial reach of many families and individuals with lower incomes. These affordability challenges also are increasingly afflicting moderate-income households,” said Chris Herbert, managing director of the center.
Adding to the crisis, the number of “severely” cost-burdened renters, those paying more than half their incomes on rent, went from 7.5 million to 11.4 million in the last decade. This, as renter incomes have declined 9 percent since 2001. Add it up, and 49 percent of renters are cost-burdened, 26 percent severely so.
Demand has clearly outstripped supply, despite a recent boom in apartment construction and a 35 percent jump in the number of single-family rental homes since the housing crash. Multifamily apartment starts are up.
“Record-setting demand for rental housing due to demographic trends, the residual consequences of the foreclosure crisis and an increased appreciation of the benefits of being a renter has led to strong growth in the supply of rental housing over the past decade both through new construction and the conversion of formerly owner-occupied homes to rentals,” said Herbert.
Homeownership is now at the lowest level in half a century, and some expect it could go significantly lower. Household formation is expected to continue its slow rise, but almost entirely on renter households, not owner households.
“These market conditions will likely continue in 2016, as newly built apartments are absorbed by demand from new, young households. Look for rental vacancy rates to remain relatively low and rent growth to outpace inflation in 2016,” wrote Frank Nothaft, chief economist of CoreLogic, in a recent report.
Mortgage interest rates are expected to rise, and that will keep more renters who might have become homebuyers stuck in place. As rents continue to rise, renters will also be less able to save for a down payment on a home.
“Title agents view first-time homebuyers as most impacted by a potential interest rate hike,” wrote Mark Fleming, chief economist of First American, in an analysis of rising rates. “Now that interest rates are pre-adjusting in response to signals from the Fed for a highly expected increase in December, demand is also declining.”
As more supply comes to market in large cities, rents are starting to moderate, but, again, that is in the higher end, luxury space. Some developers are starting to look to secondary markets and suburbs for new projects, since demand continues to be strong, but unlike the single-family construction market, the timeline for new product to reach the market in multifamily is several years out.