Economic conditions, demographic changes, and new ownership models are shifting the concept of home ownership for millennials. Where once owning a house meant establishing roots with a family, now owning a house could represent something much different. Passive income, a future dream, or a long term investment.
In our ownership series, we’re looking at the different factors influencing newly-emerging models and ideas around real estate ownership. Up first, we’re exploring a growing trend. Millennials in major cities are renting their primary residence, but also owning real estate elsewhere.
Market conditions stifling millennial home ownership
To better understand this trend, it’s helpful to look at the economic factors and housing market conditions contributing to this unconventional ownership model.
According to a report from CoreLogic, U.S. home prices are continuing to rise year-over-year. This year, national home prices increased 3.6%, and are forecasted to increase 5.8% in the next year. Despite the fact that unemployment rates are improving, most Americans still cannot afford the growing costs of home ownership. The issue is especially pronounced in more populous cities. The M Report notes that in the 50 most populous U.S. cities, it would take 13 years for a homebuyer to save enough for a house payment if they saved 30% of their income.
This issue isn’t limited to average wage earners either. A recent Wallstreet Journal article noted that 19% of U.S. households with six-figure incomes rented their homes in 2019. This is up 7 percentage points from 2006. It’s clear that even above-average earners are struggling in today’s housing market in many areas across the country.
On top of the rising home prices, millennials face a student loan crisis. This year, total student loan debt in the U.S. reached a new all-time high at $1.5 trillion. Millennials make up 34% of all student borrowers, holding nearly $500 billion in student loan debt.
Priced-out millennials may not be missing out on the ownership dream
The statistics are discouraging, but many millennials in major metropolitan areas are finding creative ways to forge their dream of ownership.
A CoreLogic report reveals that real estate purchasing activity among investors is at its highest level in two decades. Interestingly, “smaller investors” are responsible for increasing investor home buying activity.
This may correlate with a growing trend among millennials. Investing in properties in more affordable cities with the intent to earn passive income.
Startups across the country are giving this surge of small investors the tools to seize opportunities in more affordable cities. (See chart below for housing markets with most investor activity in 2018.) For example, Rooftstock offers an online marketplace for investing in single-family rental homes. The platform provides an analysis of a property and its cash flow potential. After the purchase, investors have the option to utilize Roofstock’s property management services including tenant relations and day-to-day management.
Housing Markets with the Most Investor Activity in 2018
Nadia Last, a 27-year-old living in San Francisco, knew that purchasing a home in the Bay Area was not possible for her any time soon. “I was dismayed that owning a home in San Francisco wouldn’t be possible in the next 15 years,” she said. “I didn’t just have $200,000 sitting around in my bank account for a down payment.”
Last decided to invest in a small single-family-home after talking to a friend who owned investment properties in Memphis, Tennessee. Her friend directed her to a company called Turnkey Properties. The company would help her find a property with cash flow potential and offered property management services after the purchase. “It made a lot of sense to me,” she said.
Last purchased a single-family-home in Millington, Tennessee and closed on the home in September. With her investment, Last will have cash flow and a long term investment she can unlock when she’s ready to purchase a home of her own. “Until I have an emotional reason to buy my own home —for example, having a child or getting married — I’ll continue to rent in San Francisco,” she said.
Navigating the future of real estate ownership
While traditional home ownership isn’t going away anytime soon, new models of ownership mean differing transactional needs. Remote buyers hoping for cash to flow to their coastal locations may not be in for the traditional closing table “experience” that many first-time homebuyers revel in. Digital closings may offer the simplicity, convenience, and accessibility these small investors are looking for.
For more on the future of homeownership, join us at FORE Summit in Austin, Texas this January to hear from experts who are reimagining real estate paving new ownership models.