July 8, 2019
A real estate principle known as “the 5-year rule” says that if you don’t plan to stick around in the same house for at least five years, you should consider renting. This is because buying and selling can add up to around 10% of the cost of the house. For millennials, who value flexibility, half a decade can seem a bit daunting!
In addition, a lot of time and money goes into maintaining a home with yard work, repairs, and general upkeep being required. For millennials, who treasure their free time and experiences, passing labor and expenses to a landlord can be a huge upside. This affords them the freedom to meet friends out for dinner, travel to weddings, or take international trips.
Increasingly studies show that renting is not as foolish as it was once considered to be. An article in the Wall Street Journal, “The New Math of Renting vs. Buying,” points out that over a 30-year period, the value of family home grows, on average, at 3.6% annually. Comparatively, the compound annual return on the S&P 500 is 11.1%. Renters, not needing to save for a 20% down payment or keep a large rainy-day fund for home maintenance, could free up larger portions of their paycheck for investing.
These changes in perspective, along with higher than ever levels of student loan debt, could explain why taking out a mortgage is such an important decision for the younger generation. And, it isn’t just singles who are renting longer. Couples are often choosing to live in multiple cities before settling down and renting apartments in different parts of town before deciding on their favorite neighborhood in which to buy.
Millennials are shaking up the housing market in more ways than postponing home ownership. By the time this generation decides to buy, they’re older and have had more time to build wealth. With many skipping starter homes and renting until their thirties, that first home could carry a million-dollar price tag! Toll Brothers, the largest US luxury home builder, reported that nearly a quarter of their 2017 sales were to those 35 or younger. Does this mean we will see a shift in demand away from the $200,000-$400,000 home?
One final new housing phenomenon – It appears that some young people are purchasing vacation homes before their primary residence! In many large cities, where housing prices are well above the national averages, many people are finding they can better afford vacation homes nearby while still renting in the city. In some cases, a three-bedroom house on several acres of land, even on lakefront property or with a pool, is more affordable than a studio in the city.
It will be interesting to see how these trends develop, particularly how the market adjusts to meet the changing needs of millennials and beyond.