6 Reasons Why Rent is So High – and What You Can Do

For-rent-signMillennials are having a tough time finding an affordable house or apartment to rent as they start their lives and careers. A recent report found most rental homes were unaffordable for millennials in 23 of the largest 50 cities in the U.S. The reason is simply supply and demand. But what is driving the demand for rentals and what, if anything, can you do about it?

 

1. The homeownership rate is back where it was 20 years ago, before the campaign to encourage homeownership began.

A chart of U.S. homeownership clearly shows the government-influenced boom to get people to own their own homes and then the resulting bust. It appears there may be a natural rate of homeownership due to the fact that some people will always be renters, such as students, those moving to new cities or young people starting their careers. Trying to artificially increase the homeownership rate beyond this natural rate cannot last indefinitely. Once the bubble popped, all those who owned homes – who normally wouldn’t have been homeowners – came rushing back into the rental market.

2. Millennials are now competing with baby boomers for rental units.

As if it wasn’t enough to compete against other millennials and those still scarred from the housing bubble, rental demand is also being driven by baby boomers looking to downsize or have a more convenient lifestyle. According to a recent Bloomberg article, the sheer size of the baby boomer generation is likely to keep up demand on rental units for the foreseeable future.

3. The middle-aged and middle class are renting too.

Households between the ages of 45 and 64 accounted for about twice the share of renter growth as compared to those younger than 35. Also surprising is the fact that households in the upper half of income distribution contributed 43% of the growth. These are the two groups that traditionally are the most likely to own a home. It’s not entirely clear why, but it’s likely it relates to these traditional homeowners getting burned in the last housing bust and choosing to rent while they repair their finances.

4. Millennials can’t afford a down-payment.

Not only are millennials facing poor job prospects and a lower inflation-adjusted income than previous generations, but the biggest hurdle continues to be student debt. The class of 2015 just graduated with an average student loan balance of over $30,000. This translates into a monthly expense of over $300 for borrowers on a 10-year repayment plan. This makes it difficult to save up for a traditional 20% down payment. An average home price of approximately $200,000 translates to a $40,000 down-payment, in addition to fees and commissions.

5. Millennials are much more mobile and urban.

Even with homeownership tax breaks and incentives, it usually doesn’t make financial sense to buy a home – due to all of the mortgage origination fees, realtor commissions, appraisal fees etc. – unless you are relatively sure you will be there for the next five years. Millennials are more likely to change careers, jobs and cities. They also have a preference for urban areas which limits the availability of potential rental units they are willing to consider.

6. Housing is risky and a pain.

The image of housing being an ‘investment’ that only increases in value has clearly been shattered. In addition, there is the risk of not being able to obtain a mortgage or at the very least, the intimidating amount of paperwork and various regulatory issues involved in buying a home. Once a home is purchased, there are the additional headaches of repairs and maintenance, real estate taxes and insurance. Some renters like to note that they “don’t have to pay for taxes or insurance” when renting. This isn’t exactly true because the owner of the property still pays for these things, and you the renter pay them indirectly through your total rent. But it is true that, as a renter, it is easier to pay one monthly price and not have to worry about these other details.

All of these factors are creating a huge demand for rental homes while supply simply can’t keep up, pushing down vacancy rates to record lows and driving up rents. Investors have responded by starting construction on new multifamily buildings, but these usually take a few years to complete before they hit the market.

So, what can you do in the meantime?

First, always treat housing as a living expense, not an investment. This mantra applies whether you are renting or buying. Some new urban apartment buildings are appealing to trendy millennials by adding fancy amenities. But do you really need the granite countertops, rooftop pool and separate wine refrigerator?

Trim back on other expenses to compensate. Personal financial coaches have always emphasized not letting your housing expenses exceed 30% of your budget. This is still sound advice, but it’s important to keep your overall budget in check, especially if student loans are taking an outsized bite. One positive thing about millennials flocking to urban centers is less reliance on cars. Many millennials are ditching vehicles entirely in favor of public transportation as well as ride and car-sharing services like Uber and RelayRide. Historically, transportation has been a huge expense for young people, taking up at least 8% of their budget or more.

Finally, if you can’t beat ‘em, join ‘em! If your rent is going up and you don’t have enough money for a down-payment on a house, but you do have a little money to invest, put some of those savings into a REIT or investment fund that invests in multifamily properties. This way, you own a slice of what you are paying for, and with much better diversification than sinking all of your money into a house. A property investment such as this can pay regular dividends from the rent checks and it still has the capacity to increase in value.

Chris Kuiper CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.

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  • LeSellers

    Or, you and a dozen friends could get together, write a contract that obligates everyone to stay with the program, and pay an monthly allotment until there is enough money to buy a house. Then the group buys one house for cash, and one or more (chosen by lottery) move in. They pay the equivalent of the rent they had been paying, plus their monthly allotment from the original agreement until the group can buy another house, for cash. This continues until everyone has a house.

    The original deeds could be in the name of a trust with all as trustees (or a volunteer who will be the last one in a house) until the last house is paid for so no one can renege of cheat.

    The first house will take a while, maybe four years. The scond three years,the third, two, and the fourth one. The remaining houses would be purchased every year and a half or so, all depending on how many people are in the group and how much the original allotment is.

    If it’s $500/mo, with a dozen people, that’s $72,000/year in allotments. Three and a half years later, that would give the group $252,000, enough to buy the first house. The family that moves in now pays $2,000/mo (the original $500 plus their old rent of $1,500), making $84,000. Three years later, that’s $252,000, an another house.

    In the end, all 12 familes/people will have a fully-paid-for house in about 24 years. Each will have paid far, far less than the price of a mortgage, and each will stop being renters and stop worrying about why the rent is too high. To compensate for having paid rent for all twenty-four years, the last family gets a brand new house, 20 years newer than the first one drawn from the hat.

    Add a mere $100 to the allotment (to $600/moth and the time frops to 22 years. Make it $700/mo and it drops another year to 21. Make it $,1000 and the last famiy gets their house in 17 years. Whether 24 years or 17, it beats the heck out of “never”.

    This is a common practice in many poorer countries. It works, and there is no need for credit, no need for banks/bankers.

    Mr. Magoo O’bama, will there ever be any Jobs?