There are a lot of reasons why investors should consider investing in the multifamily rental market. One of those reasons is the demand for rentals. In this article, I’m going to focus on who rents, why they rent, and the demand they are creating for this asset class.
But the first thing you should know is that from 2004 through 2016 there was an explosion of new renters.
Source: Harvard JCHS – America’s Rental Housing 2020
In fact, we saw 10 million new renter households formed in that time period. As of 2021, the number of renters has moderated to roughly 44 million. And according to RentCafe, the growth in renters came amongst all age cohorts (7% increase in ages 34 and under, 17% increase in ages 35 – 59, and 43% increase in ages 60 and up).
And while the growth in older renters is largely a lifestyle and mobility choice, the younger age groups are renting longer for a variety of reasons. So let’s examine the multitude of factors that have young people renting for longer periods of time than they ever have.
Reasons Why People Are Renting More
High Home Prices
In January of 2004, the median home price was $209,500. By January 2016, that number was up to $291,100. As of August 2021, the median home price is $390,900. That’s more than a 34% increase over the last five years. Home prices have skyrocketed to the point that many people are now priced out of the market. Their only alternative is the rental market.
New Home Shortage
Part of the rapidly escalating increase in home prices is due to a supply shortage. CNBC reports that the U.S. is short 5.24 million homes. That deficit is up sharply from 2019 when the gap in supply was 3.84 million.
The new construction industry has been plagued by labor shortages, increasing land prices, and supply chain disruptions. These difficulties began well before the pandemic, but have clearly exacerbated the problem.
Low Wage Growth
As we saw earlier, between 2004 and 2016, home prices increased 39%. They increased another 34% between 2016 and 2021. The next question is what did wages do during those same time periods?
In 2004, the median household income was $57,674. By 2016 it had risen to $60,309. That’s only a 4.6% increase compared to the 39% increase in single family homes. Since 2016, median household income has grown faster. By 2020, the median household income was $67,521. That’s a 12% increase since 2016 which is still almost three times lower than the increase in home prices.
As you can see, it’s very hard to afford a house when the median household income has only risen 16.6% since 2004. During that same period of time, the cost of houses have gone up 73%
Homes are rapidly becoming unaffordable for a large swath of the population. But homes aren’t the only thing people are struggling with.
Have you been to the store lately? Have you driven a car?
Prices aren’t just up, they are way up. For example, beef is up 12.2% in August 2021 compared to August of 2020. In that same time period, eggs are up 9.9% The USDA predicts that by the end of 2021 wheat will have gone up between 33% and 36%. This is inflation and it hasn’t been this bad for years.
Whether you’re eating at home or in a restaurant, food prices are universally up. And so is gas. As of October 19, 2021, the average price of gas is $3.34 a gallon. A year ago, people were paying $2.17 a gallon. That’s a 54% increase. And unfortunately, there are places where gas is over $5.00 a gallon.
The primary mode of shipping these goods in the United States is via trucking. With gas prices as high as they are, it should come as no surprise that almost everything you buy today costs more than it did last year. This inflation is impacting us all.
2021 is definitely the year of sticker shock…and they say it’s going to get worse. The rental market allows people some relief. The lower cost of renting instead of owning affords people extra cash to spend on everything else.
In many ways, COVID-19 has been a black swan event. It’s a 100 year pandemic that has negatively affected every aspect of our lives. When it began, the economy was shut down and we all went on lockdown.
We watched in horror as our friends, neighbors, and family members caught the virus. Most survived, but many did not.
Once the vaccines became available, places started opening back up, but life as we knew it has yet to return. Lessons learned from COVID-19 are plentiful. However, financially speaking we learned that job security is a myth, savings rates are too low, investing for passive income outside of your primary job is wise, as nothing is guaranteed.
Why The Rental Market Is Strong
The rental market is strong for a variety of reasons. Across every age cohort, we are seeing high numbers of renters.
The over 60 crowd is coming into retirement and many want mobility. They want to be closer to their children and grandkids. They want to live without the responsibility of maintenance, lawn care, and upkeep. Living in rentals has been the perfect solution and that’s why this is the fastest growing group of renters. They’re turning to the rental market and once this group downsizes, they typically do not go back to buying a home. They rent for the rest of their lives.
As for Generation X, Millennials, and Generation Z, they are delaying homeownership and renting longer than previous generations did.
Until recently, wage growth had been stagnant. Unfortunately, as incomes have risen in the last few years, inflation has canceled out that growth. Today it’s harder to make ends meet. Home prices have skyrocketed and a new home shortage has only exacerbated that problem.
With expenses at an all time high, people simply don’t have a lot of discretionary income right now. Their money is being spent on necessities. And while a roof over one’s head is a priority, many are opting to make the economical and lifestyle choice of a rental.
As the New York Times puts it in their June 2021 article:
Renting is Cheaper Than Buying, Almost Everywhere
Their article references a Lending Tree survey that was done in 2021 looking at the 50 largest metropolitan areas in the United States. They found that renting was cheaper than owning with a mortgage in every metro.
And whether it was $300 a month (on the low end), $1300 a month (on the high end), or somewhere in between, that savings was material. This is a major factor as to why so many Americans rent.
The rental market has been strong for decades and has a very bright future ahead of it. Smart investors get ahead of these trends and put their money in healthy industries providing healthy returns.
If you’ve ever considered investing in apartments, now might be the time to take action. If you’d like to learn more about these types of investments or how to invest with 37th Parallel Properties let us know by scheduling a no-obligation introductory phone call.