The Rental Trap

Agents can help prove their value by steering Millennial renters down a path to homeownership, and by promoting the benefits of owning over renting. Housing costs are high, and more than 35 percent of Americans spend more than 30 percent of their income on housing, according to Harvard University’s Joint Center For Housing Studies. The cost of renting is already outsized due in part to high demand for apartments. Of renters, 50 percent are cost burdened and 28 percent spend more than half their income on rent.

Harvard mapped the study’s results, designating the level of cost burden for each region in the country via splashes of purple, violet, lavender and gray. Out of the 381 metro regions surveyed for the study, the Chicago area ranked 58th in the number of households that spent at least 30 percent of income on housing. In the Chicago-Naperville-Elgin, IL-IN-WI Metro Area, 39.5 percent of all households are cost-burdened and almost 20 percent are severely cost-burdened, the study found. The median annual household income for the area was $59,000, and the median monthly cost of housing was $1,200. Among homeowners in the region, 33.3 percent spent at least 30 percent on housing costs. The median income for homeowners was higher at $75,200, but costs were also higher at a median of $1,489. The region ranked 40th in the nation in the number of homeowners who were cost-burdened.

Rental statistics were more grim. Just over 51 percent of renters in the region fit the definition of cost-burdened. They had a median annual income of $33,000 and median monthly housing costs of $940. Chicago fared better in terms of national ranking for rental cost burdens, at 132nd out of the 381 metro areas studied.

A Continuing Recovery

A shortage of inventory on the rental market and the rising cost of leasing an apartment in Chicago offers some incentive for Millennials to finally think about purchasing a home. Other factors in play include an improving job market, job security and wages. According to the U.S. Department of Labor’s Bureau of Labor Statistics, the unemployment rate in the Chicago-Joliet-Naperville, Ill.-Ind.-Wis. metropolitan area has fallen about 2.7 percentage points in the past year to 5.6 percentage points in Dec. 2014, though it remains stubbornly higher than the national average of 5.5 percent in February. The national rate remains disproportionately high for Millennials age 18 to 34, at about 7.8 percent. Earnings for workers in the Chicago metropolitan area were slightly higher than the national average in 2013, at $23.95 per hour compared to $22.33 per hour for the rest of the country, according to the bureau.

Persistent low rates for 30-year fixed rate mortgages – with a national average around 3.7 percent and 3.6 percent for Chicago in the final days of February, according to Zillow Mortgages – offer some incentive for people to start thinking about purchasing a home rather than renting.

Many Millennials who came of age during the recession watched their parents and older family members fight to hold onto their homes during the economic downturn. The experience turned many into savvy and conservative shoppers who tend to shun disposable purchases and consumer trends in favor of experiences and lasting products. They may also be willing to forego a larger home in favor of something smaller that they can easily afford, particularly if it is in a neighborhood with amenities they consider desirable.

A study released last year by UBS Wealth Management Americas found that people age 21 to 36 are the second-most fiscally conservative generation since the Great Depression, and that many hold a Depression-era mentality that leads them to hold more cash in their portfolios than other investors – at 52 percent cash compared to 23 percent for all others. They are largely aware of their aversion to financial risk, but their perception of it is slightly skewed. About 34 percent describe their financial risk tolerance as conservative or slightly conservative, while UBS assesses their actual cash allocations as extremely conservative.

Contrary to some perceptions of Millennials as averse to holding onto their money, the recession turned them into a generation of savers. UBS found that most believe saving their money was the best financial advice they’ve ever received, while other generations cited investing. Among Millennials, only 12 percent said that they would invest found money, and 28 percent said that they believed long-term investing could help them succeed and are more focused on reaching their own goals than in hitting a particular market return on their investment.