Millennials are fueling a rental boom but when will the tide turn?

Posted on Nov 23, 2014


By Erin Arvedlund, Inquirer Staff Writer | POSTED: November 23, 2014

Millennials are holding off on buying homes.

The result: an extended rental trend among 25- to 34-year-olds that is bringing real estate opportunities of its own.

Between 2000 and 2010, the number of millennials nearly doubled in central city neighborhoods of the Philadelphia-Wilmington-Camden metro area, to 50,273, according to an October report from think tank City Observatory.

But younger adults aren’t interested in owning homes, according to recent Pew Charitable Trust research. The number of homes owned by Philadelphians age 25 to 34 fell 26 percent from 2000 to 2012, although the total population in that age group increased.

Real wages have declined in this age group: Median income in 2006 was $33,169, while in 2013 it totaled $30,759, a loss of 7.25 percent, said Phil Marchese, senior vice president, wealth management, at Morgan Stanley in Center City.

In general, millennials can’t pile on their debt load with a mortgage, Marchese said. “They have high student-loan balances, and that doesn’t put them in a position to be buyers.”

Houwzer, a start-up founded by Michael Maher, chief executive officer of Benjamin’s Desk, a coworking office space in Center City, hopes to play this trend by competing with brokers such as Berkshire Hathaway Home Services Fox & Roach and Redfin to ease millennials into their first purchases.

“We will list homes for free and remove the 3 percent commission, so we essentially represent buyers for free,” Maher said.

Houwzer is in the process of hiring agents and building the business, he said.

Millennial buyers are struggling with higher prices, tighter mortgage-lending procedures, and a still-unsteady job market. According to National Association of Realtors data, just 33 percent of home purchases this year were made by first-time buyers, down from 38 percent last year and well below the long-term 40 percent average.

Said Maher: “We’re really bullish on the market despite what people say. Yes, millennials are wired to rent and be mobile. But when they have families, they’re going to think about buying.”

Don Ganguly, of Irvine, Calif.-based HomeUnion, founded the online real estate investment management firm in 2011 to help investors monetize the rental trend among the young and the restless.

Institutions “have only bought about 250,000 properties. There are about 14 million properties” out there, he estimated.

HomeUnion specializes in single-family rentals and helps connect prospective investors with houses, rather than apartments.

“Millennials are beginning to form new households, but unlike past generations, that doesn’t mean buying a starter home,” Ganguly said, citing a Nielsen study showing that millennials account for 43 percent of current heads of household who intend to move in the next two years.

Because millennials represent 27 percent of the U.S. population, “this bodes well for the future of the single-family rental market,” he said.

“We’re trying to solve two problems,” Ganguly said. “People want to invest in real estate, but they don’t know how. They end up trying to buy something in the line of sight.”

Instead, HomeUnion finds the properties remotely and insists the rent must equal at least 1 percent of the home price. A $125,000 home should rent for $1,200 a month. Returns can total 5 percent to 9 percent annually, he estimated, noting, “Your money goes further, and you’re not dependent on one tenant.”

HomeUnion also makes money: “We charge an asset-servicing fee, and when they sell, we make a transaction fee.”

Will this trend in home-buying behavior last? Mortgage applications indicate that few new buyers are entering the market, and that they are at their lowest number since 2000.

Don Frommeyer, CEO of the National Association of Mortgage Professionals, said that the gap between buying and renting is widening, and that the rental market as a whole has seen a boom in recent years.

“Despite mortgage rates remaining at low levels, buying a home isn’t as big of an objective” for millennials as it has been for other generations, Frommeyer said.

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@erinarvedlund

Repost from Philly.com


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