Is the USA Becoming a Renter Nation?

Homeownership has been on the decline for many years now. The rising amount of individuals and families renting creates a higher demand for rental properties. The higher demand in rental properties means that rent increases which in turn drives property values up. This is great for the longevity and stability of investing in multifamily for many years to come.

Rising home prices

The home prices in the USA have been steadily increasing at a rate of about 4% a year on average. That means that a house 20 years ago that cost $75,000 is now going to cost about $165,000. The 4% increase a year applies to the entire USA. Most of the younger population wants to live in or at least close to a metropolitan city which has seen home prices increase much more than 4% a year on average.

Rising expenses

Inflation tends to be somewhere between 2-3%. This means that the cost of goods increases by that amount each year. Sometimes during high inflationary periods, inflation can double or even triple. Inflation isn’t necessarily the problem; the problem is inflation at 2-3% and median household income increases <1%. The household income is not keeping up with inflation so families can afford less and less each year. Since they are using more of their income for goods such as groceries, gas, clothing, etc. they have less money for housing and this makes renting appealing for most families since the down payment to buy a home is getting harder and harder to save for.

Student loan debt is also a huge expense for most younger people. Kids are graduating high school with no experience in the world and picking careers that require bachelor's or even more advanced degrees. Most of the time these kids have no experience with the field they are studying but they are collecting massive amounts of student loans and when they graduate, they realize they don’t like the field they paid all this money for. Whether or not they work in their profession, they are still burdened with student debt. There are always discussions and rumors surrounding the student loan issue, but no concrete solutions have been put in place and college tuition fees continue to rise.

Stagnant wages

Over the last 40 years, the median household income has grown by less than 1% a year. Without the increase in household income, the idea of buying a home is out of reach for many. It's difficult for the average American family to save for a 20% down payment on a house or even have an emergency fund with increasing expenses and stagnant income. Yes, there are loan options for first-time home buyers where they only put 3% down or 0% down but are those the best financial idea? Not having enough equity in a home makes it hard to sell if you need to get out of the home and home prices drop.

In today’s society, it is easier to get paid more by moving to a new company than to get a raise or promotion. Because of this, the need to relocate for a job could be common and needs to be taken into account. It is much easier to pack up and move to a new city when you are renting. It is not impossible to pack up and move cities when you own a home but it does add a level of complexity and stress that renting doesn’t.

Transient Youth

Today’s youth is much more transient than older generations. Older generations had the dream of starting a family in the suburban home with the white picket fence. In today's society, more individuals are choosing to delay marriage and starting a family. Additionally, some couples are opting out of having children altogether. It is not impossible to buy a house when you are not married but most people don’t for various reasons. Without the income of a spouse, homeownership is difficult to obtain. Most families want a home to raise a family in and a nice backyard for the kids to play in. If the couple decides not to have children, the need for a home might not appeal to them as much. One reason couples choose not to have children is the added responsibility. The same goes for home ownership.

Maintenance and Responsibility?

Buying a home requires constant upkeep and maintenance. The younger generation seems to prefer the concept of renting over owning property because it involves less responsibility and commitment. Renters can just call the landlord to tell them they have a leaky faucet or fix the smoke detector. Depending on the age of the home, older properties are generally cheaper but require more maintenance. The maintenance cost can add up and if you buy the house because it was affordable, you might not be able to afford the maintenance on the house. Some maintenance items become even more expensive to fix the longer you wait to get them fixed.

Interest rates

No one knows where interest rates are going and it is impossible to time interest rates to get the best deal. Some people say wait to buy until next year when interest rates drop, some people say buy now and refinance later when rates go down, but what if you can’t afford the house at the current interest rate? Interest rates have been as high as 18.6% and as low as 2.65%, which is a huge spread. Saving for a down payment can feel like trying to hit a moving target. You have an idea of how much house you can afford but interest rates are always changing and home prices are usually fluctuating upward.

Conclusion:

The higher the number of people renting, the greater the demand for rental properties. We believe that the rental market is robust and will continue to grow stronger over time. While several sectors of the economy are facing challenges such as inflation, job growth, and unemployment, multifamily real estate is thriving. It is advisable to include multifamily real estate in one's investment strategy.