Written by Mary Buffett
Why more Americans are aggressively entering into upscale rental marketplace.
As people begin to seriously think about where to live, there is a remarkable sea change afoot with millennials, empty-nesters, and the newly single. Instead of plunging in to buy a home, people are weighing other options. We all know how life is supposed to work. Boy meets girl, they graduate from college, get married, and spend an exciting turn in The Big City before they settle down to raise a family in the suburbs.
Developers instilled that home ownership was at the heart of creating a safe place for all families. After the first generation of 30-year mortgagees found their way into the marketplace, home ownership rates soared. Soldiers returning after World War II used the GI Bill to purchase their very first home with a down payment of a dollar.
In good times and bad, home ownership remained a safe bet even when the contours of life changed. Somebody always got the house in a divorce. Even after the children were fully grown and on their own, parents would keep the Big House and it would fill with grandchildren during the holidays.
Then everything went to hell. As the housing refinance industry became a financial behemoth, home values rose beyond the point of sustainability. We all know what happened after that. A sick housing market nearly killed the financial industry and we almost had the Second Great Depression. Only substantial federal intervention kept the nation from revisiting the breadlines of the 1930s. Worse, a generation of young teenagers saw the fear and anxiety on the faces of their parents as they fell behind on their house payments and stumbled into foreclosure.
Nearly a decade later, those same teenagers have graduated from college, entered the job market and are looking for places to live. However, unlike their parents, they are waiting before they purchase their first home. Meanwhile, empty-nesters are downsizing and looking to jettison square footage they no longer need. Those who are newly single or are taking a job in the Midwest, where there is job growth, need a nice place to live. Rather than go through all of the paperwork of purchasing a home, more and more of them are looking at upscale rentals. What’s more, they are staying. The rate of home ownership, which crested at nearly 70 percent before the meltdown, fell dramatically to its current rate of 65 percent.
What is driving all of this? First, Americans are looking at real estate with more rational eyes than they did a decade ago. A herd mentality dominated the period between 1995 and 2007, where people bought any parcel to ensure they would not be left behind. The housing appreciation of that period seemed too good to be true. Homeowners soon refinanced their mortgages and many used it to underwrite their own extravagance as they lived beyond their means. Even after the economy has rebounded, millions still remain handcuffed to zombie mortgages that will remain upside-down for the rest of their lives.
Second, qualifying or refinancing a traditional 30-year mortgage is far harder today than it was during those go-go years. The days of “Alt A” loans other subprime tools are long gone. The times when you needed little more than a smile and a signature to purchase a home have been replaced by a stricter regulatory demand for full documentation for all phases of the loan origination process. Even Ben Bernanke, who, while chairman of the Federal Reserve, worked overtime to keep the nation from a complete economic collapse, was recently turned down to refinance his mortgage.
Third, we are shifting from an ownership to a rental culture. This has a greater social implications impact far beyond real estate and we can see it in our everyday lives. Instead of spending thousands of dollars on DVDs for home use, people are paying Netflix $8 per month for access to their entire film library.
“When it comes to choosing a home,” remarked Jay Madary CEO of JVM Realty Corporation, a Chicago-area privately held multi-family investment and property management company, “many Americans now consider renting upscale apartments because they can get amenities they may not otherwise find in a home within their price range. They can have granite countertops, high ceilings, walk in closets, as well as access to private fitness centers and resort style pools and gathering areas.” If they purchased a pre-owned home, chances are that it will be far older than an upscale apartment and if they wish to upgrade to those modern amenities, it will come out of their own wallet. With an upscale rental, you can get what you want today. Best of all, there is no long-term commitment and no ongoing maintenance obligation.
Homes can become “long in the tooth” after a decade. Appliances need to be replaced and exteriors as well as interiors need to be repainted. Older homes come with older problems. They were designed and built for what families wanted in the 1960s, ‘70s, and ‘80s, but you’re living in 2014. Who knew what a “smart home” was back in 1973? Also major upgrades can quickly become expensive and these costs will compete alongside college tuition payments for children or extra support needed for aging parents. Besides having to pay back those college loans.
Let’s not forget the disruption that comes with life’s little surprises like marriages, divorces, blended families, job changes, or even periods of unemployment. Having the flexibility to adjust to your new reality is critical. Should you choose the upscale apartment option, you can simply move out at the end of your lease and resettle into something else that better suits the needs of the moment.
Yes, renters will lose the tax benefits that come with home ownership but if you rent an upscale apartment, you need to see the bigger picture. Before you sign that mortgage paperwork for that “fixer-upper” of your dreams, you need to take into consideration the additional costs of modernizing your new purchase. Those costs alone could quickly eat up any tax benefits. If you don’t believe me, check out the cost of a basic kitchen remodel.
In this area, Americans have become wiser. Rather than purchase a home far too early in their lives, they are taking their time to plan out their choices and options. Rather than deal with the headaches that come with modernizing an older house, more and more of them are opting for a turn-key solution that comes within the upscale rental market where they have their cake and eat it too.
With this trend comes the opportunity for investors to balance their portfolio with holdings in a real estate fund.