Research Insights, April 01, 2015
Millennial Mirage: Which Apartment Markets Will Be Most Impacted
Millennials are on every real estate investor’s wish list, especially apartment investors, and for good reason. They are today’s largest demographic cohort, at 87 million compared to the 76 million Baby Boomers. Highly educated, with 60% being college educated compared to 46% for their baby boomer parents2, this makes the Millennial Generation even more attractive.
MILLENNIALS DRIVING APARTMENT DEMAND
Millennials are now in the prime renting age range of 18-34. In addition, they are getting married later and having children later. While 48% of Baby Boomers were married when they were the same age as Millennials today, only 26% of the current generation are married3, increasing renter demand. Marriage and children are contributing factors to homeownership decisions, as married 25-34 year olds make up 49% of first time homebuyers while only comprising 30% of renters4 and homeownership rates are even higher for all households with children, at 61%5.
Economic factors are further elevating apartment demand as Millennials have struggled disproportionately during the recent economic downturn. Between 2007 and 2013, the number of employed Millennials increased a scant 0.3% while employment among Baby Boomers increased 9%6. Additionally, home mortgage debt availability has declined as underwriting standards tightened significantly after the subprime mortgage crisis. While the Fannie Mae and Freddie Mac minimum credit score guideline is 620, 7427 is the actual average credit score for guaranteed Freddie Mac loans. Add to this record levels of student debt and it gets pretty hard for many Millennials to get past the underwriting for a home loan today.
Among Millennials 25-34, the 2014 homeownership rate was 40.1% compared to the thirty year average of 45.5%8, equating to nearly one million fewer 25-34 year olds who are homeowners – a substantial tailwind for renter demand.
MILLENNIAL APARTMENT DEMAND MIRAGE
While a boon to renter demand today, long-term apartment investors would be wise to examine the sustainability of the factors creating this outsized renter demand. First, while fewer Millennials are getting married today relative to the baby boomer generation at the same age, it doesn’t mean they don’t want to, as US Census data show 69% of Millennials anticipate being married eventually. Second, while they are also delaying starting families, this too doesn’t mean they don’t want to have children as 55% of younger Millennials expect to have children in the next five years9. Third, despite these demographic delays, 93% of Millennial renters plan to one day own a home.
Lastly, the economic factors previously depressing homeownership are also lessening as employment prospects among Millennials are improving while changes to increase the availability of home mortgages are being made. Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency have all loosened lending guidelines in an attempt to facilitate increased mortgage lending activity. Additionally, the minimum down payment required by Fannie Mae and Freddie Mac to avoid mortgage insurance was lowered from 5% to 3%. The impact of these changes will be very real -- the Urban Institute estimates that had lending standards in 2012 been in line with 2001 standards, not even bubble era standards, 1.2 million more home loans would have been made in 2012.
There is also a new and powerful economic factor that is changing the rent-versus-buy calculus: rising rental rates. Nationally, rental rates are nearly 10%12 above the previous cycle highs. While the average mortgage now equals 21.4% of household income, the average rental rate exceeds 30% of income, and these increased rents are starting to have an impact on the Millennial rent-versus buy decision. In 2014, 32% of homebuyers were Millennials, up from 28% in 201213. Improving employment prospects and loosening credit standards are reversing key economic factors previously driving Millennial rental demand while rising rents are changing the economic balance between renting and buying. Add to this attitudes toward marriage and children that are not so different from previous generations and investors may find today’s elevated levels of apartment demand looking more and more like a mirage than an oasis.