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Will Rising Rents Finally Push Millennials to Buy?

by Peter Thomas Ricci

Could sky-high rents be the final push Millennials need to buy a house?

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Record-low home prices and historically low mortgage rates have not been enough to entice Millennials to buy homes, but now analysts have struck on another economic trend that, they argue, may finally bring Millennials to the homeownership fray – high rents.

The numbers are certainly there: at the end of 2014, the U.S. rental vacancy rate hit a 21-year low, with the low supply driving up rents universally across the country; here in Chicagoland, rents are up 12.92 percent over the last three years, according to the National Association of Realtors, and renter households have risen 11.39 percent in that same time span; mortgage payments, meanwhile, have risen just 4.01 percent since 2009; and finally, according to recent Labor Department figures, Millennial unemployment has dropped from 10.6 percent in Oct. 2009 to 5.4 percent in February.

It all adds up to a very encouraging series of stats for the housing market, one that would suggest that we are just around the corner from a deluge of Millennial housing demand. But as with any other sector of the economy following The Great Recession, there remain considerable uncertainties.

Qualifiers on Millennial Housing Demand

There are a number of downsides to consider when it comes to Millennial housing demand, among them:

•Millennial employment may be improving, but those advances have not corresponded with stronger wages. In 2014, wages were up just 2.2 percent (essentially flat when inflation is factored in), and specific to Millennials, wages have actually been negative in recent years. According to recent analysis, from 2007 to 2013, the wages for Millennials working in manufacturing fell 2.8 percent, compared with declines in the sectors of business (4.3 percent), retail (10 percent) and hospitality (14.8 percent). For Americans aged 18 to 24, the declines have been even worse – the retail and business sectors saw wages fall 21 and 22 percent, respectively.

•A large share of recent college graduates remain stuck in work that does not require a college degree. According to research by the New York Fed, between 55 and 60 percent of college graduates with degrees in communications, liberal arts, business and social sciences are not working in jobs that require a degree, and in fields such as agriculture and leisure/hospitality, those shares are 55 and 63 percent, respectively.

•Millennials have the lowest savings rate in the nation at -2 percent, compared with 3 percent for Generation X, 6 percent for Younger Baby Boomers and 13 percent for Older Baby Boomers/Silent Generation. And considering that savings are uniquely important to Millennial homeownership – according to NAR’s 2015 Generational Trends report, 83 percent of Millennials utilized savings for their down payment – such an average is not encouraging.

•And finally, there is student debt, the true wildcard in the Millennial homeownership debate. Since 1993, the average student debt burden has doubled to $33,000. As of 2013, according to a new study from the Federal Reserve, all 48 mainland states have between 20 and 30 percent of their 25-year-olds living at home with their parents (here in Illinois, the share is between 50 and 60 percent). Even when Millennials move out, they’re opting to rent with other debt-addled Millennials – the share of doubled-up households has risen from 25 percent in 2000 to 32 percent in 2012, and here in Chicagoland, 36 percent of all households are doubled-up.

•With all those factors at play, it’s perhaps no surprise that the first-time homebuyer marketshare was just 29 percent in February, far below its 40-45 percent historical average and the lowest level since 1987.

The Rental Quagmire

A recent analysis by Zillow spotlighted just how serious a quagmire many renters find themselves in, when it comes to affordability. Here in Chicagoland, according to the analysis, renters devote 31.1 percent of their monthly income to renting, compared with the 13.9 percent homeowners devote to their mortgage payments; so the average rental payment, in other words, is 2.24 times that of the average mortgage payment.

Many of those renters, no doubt, aspire to homeownership, but for a myriad of reasons – low incomes, stagnant wages, tight lending standards, low credit ratings – are unable to make the transition from renting to owning. And thus, cash-strapped consumers remain stuck renting…and with rents rising, they can expect a bigger and bigger share of their income to go towards housing.

So will 2015 be the year of Millennial homeownership? It’s impossible to say with any certainty, but we’ll be watching the market closely for any indications.

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