Forever Renters?

Two weeks ago, I put up a post regarding the merits of renting vs. home ownership and how things appear to be changing for young adults compared to previous generations.

It generated a great deal of mail and phone calls. I suspected some anger from people saying that home ownership was the only way to go. Not really. A few people stated that it was the only way for most people to accumulate any meaningful capital which is what I heard over 40 years ago.

Today, people are marrying later or not at all. The Cape Cod house with the white picket fence around the yard has little appeal to these young adults. Also, the supply of affordable housing does not meet demand so, as prices rise, more young people are excluded from the possibility of home ownership. 

One reader who is wildly successful wrote to tell me that he doubted if he would ever buy a house unless it was a vacation home. He wrote: “I agree completely that if you take your down payment money and invest it you will be better off than buying a home in many cases. To succeed at this, you need to be very DISCIPLINED (caps his). Each year, I max out on my 401k but also take property tax and maintenance money that I would have to spend as a homeowner and invest it. Also, I have flexibility. If I change jobs or want to move, it can be done easily. I am 33 and may marry someday. If we have kids, I will probably buy a house. Otherwise, I will be a forever renter. 

Today, RentCafe estimates that the average rent in the US is $1,700 per month. Of course, an average is often a misleading statistic. In San Francisco, it could be several times that for a fairly modest apartment. In a rural or downtrodden, rent is often under $1,000 for a decent place. Two weeks ago, The New York Times did a spin on the RentCafe data, and showed how much square footage you would get in several markets for $1,700 per month.

Results were interesting. In a select sample of Manhattan zip codes, $1700 gave somewhere between 211-234 square feet. In Memphis, you were able to rent 1850-2000. Oklahoma City and Tulsa were quite renter friendly with the average national renter tariff getting you 1870 to 1970 square feet. As markets, the two Oklahoma entries were the most reasonably priced. 

It seems for many young people that even renting can be a stretch these days. Rents have moved sharply upward as real estate prices have jumped in the last few years, so it is causing some real problems for people under 30. As rents have escalated, some can handle it but are not able to save for a down payment on a home which pushes back their initial purchase by several years. Others cannot handle the rent, period.

Here is one example, perhaps not typical, that I learned after the last post about buying vs. renting. A young man who lives in a small town in Pennsylvania wrote to me and told me of his current struggles. He allowed me to use his comments after we jointly edited what he said and changed a few personal details. Here goes: “I am 26 years old and do not think that I will ever own a house. Three years ago, I graduated from a state college and picked up a job locally. I had $37,000 in student debt. Over the last two years, I have interviewed at businesses in big cities—New York, Philadelphia, Boston and Washington, DC. Before each interview, I visited college acquaintances and checked on living costs (especially apartments). Landlords wanted a few months’ rent in advance or a very large security deposit. One place offered me a job but would not pay moving expenses. Friends said ask your parents for the rental advance and moving expenses. They simply do not have it. I do not pay them rent but do pay for some of the food and the utilities. Now that I am paying back the loans again (after the Covid hiatus), I have little money left. My job is not bad, but it is dead end as is the town where I am now living.”

He also struck me with one comment re the student loans. Friends told him not to worry as the loans will all soon be forgiven. His response was as follows: “You did not know what politicians will do. Also, I signed the damned loan paperwork and understood the terms. I need to be responsible.”

Is my young friend an extreme example. Perhaps a bit. Yet, I remember being told 30 years ago by an ad agency CEO after I gave a presentation at a conference that he wound up only hiring upper middle-class kids. Their parents could subsidize them for a few years by picking up rents or part of them until their son or daughter was no longer earning an entry level salary in New York. 

So, until the real estate market cools off, many will not participate in “The American Dream” of home ownership. Others will be excluded, and some will choose a different lifestyle.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Real Estate, Demographics and The Media

 Way back in 1976, I often read William Rickenbacker’s financial commentary in William Buckley’s NATIONAL REVIEW. I agreed with much of what he wrote but was always impressed by the remarkable clarity of his writing style. In a book that he wrote at about the same time, he took on the issue of home ownership.

He wrote—“Rent your house or own it?…….You have to do some pretty sharp figuring to come out ahead, one way or the another." As a young, single renter at the time, I raised this issue with many people. To a person, they all said that he was crazy. Homeownership was the only way someone like you (read loser) could ever have any financial security or build up any wealth. 

Rickenbacker essentially stated that if you invested the $10,000 that you would use for a down payment (for a $40,000 house in ’76) and bought stocks with it, plus allocated $1500 to equities that you would have had to use for maintenance of your dwelling each year, the result would usually match or exceed the appreciation of the house. At the time, the Dow Jones Industrial Average (DJIA) was at 700 and today as I type is perched at 37,592. So, unless your luck was unusually bad, renting could have indeed worked out well especially when you add several decades of dividends to the mix. 

A few years later, I was married, planning a family and bought my first house. Yet, Rickenbacker’s math kept gnawing at me so I suppose that is why residential real estate has always been a relatively small portion of my net worth. 

For baby boomers such as I, purchasing your first home was a right of passage. Some 79.2% of baby boomers were home owners while today 66% of all adults are homeowners. 

Recently, market analyst Meredith Whitney who became famous for forecasting the 2008 real estate debacle, is again weighing in on real estate. She says many things that are hard to argue with given, you guessed it, demographics. Many US adults are marrying much later than in the past, if they marry at all. In fact, she states correctly, that the rate of household formation is the lowest in 160 years (during the Civil War close to 600 thousand young men died so they never formed their own households). Now, the low rate is due to a strong change in lifestyles. 

Another problem that she brings up is household affordability. Some lucky young people were able to obtain mortgages at 3-4% for several years. Now, with more realistic long term interest rates, many young adults are priced out of the market for the time being. Lifestyle wise, many seem to like their turnkey existence and 30 years of mowing the lawn has little appeal. The average age of current first time home buyers is 38 which has to be an all time high.

She raises a regional issue that I believe is absolutely spot on. Some states such as Utah, Texas and a few others will grow and housing permits and construction will continue to move ahead smartly. In some states such as New Jersey, parts of Pennsylvania, California and Illinois will likely lose population and housing prices may weaken.

She also warns of a “Silver Tsunami” in real estate. As more baby boomers (born 1946-1962) become senior citizens they will sell their homes and move to apartments, smaller houses or go to continuing care facilities. This could really hurt real estate values in the future.

While I agree with her demographics and how many millennials may never purchase a single family residence, the Silver Tsunami argument is a bit overstated to me. When many of we early baby boomers hit retirement age, a number of Wall Street forecasters and some demographers forecast that US stocks would plummet as we took our Required Minimum Distributions (RMD’s) from our 401k and 403B plans. It did not happen.

The same thing may hold true for real estate. Many of my fellow geezers want to stay in their homes as long as possible. Yes, some will sell and a number will have to sell. Yet, with 70 being the new 50, a large number will stay in place for longer than has been the case historically.

I am not criticizing Ms. Whitney. She has a fine track record and her opinions always merit serious consideration. The idea that real estate has no place to go but up in the future has been said for decades but today those people appear to be inducing selective amnesia regarding 2008.

Millennials face household affordability and student debt in many cases but also, a different vision of The American Dream relative to any previous generation in America. That will have repercussions in the real estate market of the future.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com