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Wonder Why: To Rent or Buy?

Wonder Why: To Rent or Buy?

Research reveals many variables that influence consumers’ decision to rent or buy.

May 23, 2016

From Own To Rent: Who Lost the American Dream?” asks a Trulia blog post. The American housing market was dealt a blow during 2008’s downturn, and since then the number of consumers who own homes has declined from 43.3% to 38.5%.

Who are these now-renters?

Some groups include:

  • Older millennials who, despite their prime age to buy starter homes, can’t “make the leap.”
  • Hispanic families rent at twice the frequency of whites, African-Americans, and Asians.
  • Las Vegas finds renters up 9% in nine years, now comprising 49.4% of all households.
  • The affluent and upper middle-class gained share in rentals “in part because lower and middle-income households were already renting at significantly higher rates.”
  • “And finally, everyone,” as average rent costs rose 22.3% in the largest 50 housing markets, while median incomes dropped 4.2%

In short, the 50 biggest housing metros show renters up 36.1% from 2006 to 41.1% after 2014.

Homeownership is down 5%.

Research reveals there are many variables that influence consumers as they choose to rent or buy.

It is not always advantageous to own.

‘I do not gather things, I prefer to rent them rather than possess them.’ –Jerzy Kosinski, novelist

One reason to rent may be because “Affordable Starter Homes Prove Increasingly Elusive,” per The Wall Street Journal. Census figures show starter homes—those below $200,000—comprised 19% of sales last year. This is a decrease of 38% from the prior four years.

Meanwhile, houses priced $300,000 to $500,000 consisted of 34% of new home sales, an increase of 22% from 2011.

Homes built at the lower end of the spectrum fell from 16% in 2000 to 7.9% in 2015, while construction in the top third rose from 57% in 2000 to almost 69% last year.

“The shift reflects drastic changes in… home building and the profile of buyers since the housing bust,” says the article.

Tougher underwriting impacts first-time buyers, and builders accommodate those who can afford more.

The price of land also has risen. More affordable land is far removed from large metro areas, a further challenge for the first-time buyer.

It is important for consumers to get started in the housing market, notes one developer, as that market is the one that will eventually move up.

“I don’t know what happens when you take that segment out of the marketplace,” he said.

Echoing this sentiment is another Trulia post: “Big Cities Are Becoming Too Costly for Lower-Income Residents.” “America’s 10 most expensive metros have a lot going for them. They’re big. They have plenty of jobs,” and desirable locations.

However, “the cost of housing has become so expensive that lower-income households are getting squeezed out.”

One interesting finding: Those with incomes of less than $60,000—still above the national median household income—comprised about half of all residents departing from cities.

What ramifications might result when consumers move from locations with potential for good jobs and career growth to areas with lesser opportunity but greater affordability?

Perhaps a bright spot in homeownership exists for a few. Note that the “Homeownership Rate Ebbs For All But Gen X.” For households age 35 to 44, homeownership rates grew during the first quarter of  2016, “the second straight quarter of year-over-year increases.”

The “cautiously optimistic sign” is that the cohort has a few “boomerang buyers” who re-enter the housing market as economic circumstances improve. The change is not statistically significant, the article says, but “the 0.5% increase is just at the upper bound of an error rate of 0.5%.”

‘Perhaps home is not a place but simply an irrevocable condition.’ --James Baldwin, author

Let’s consider sentiments and experiences of unique groups as they decide whether to rent or buy.

“Sometimes it makes sense to sell the family homestead and rent,” according to a recent article at Money. More retirees opt to rent: From 2005-2015, the number of renters age 60-64 almost doubled.

Three rationalizations:

1. Boomers aren’t sure where they might like to ultimately live, and renting provides opportunity to “try before they buy;”

2. Savings accounts grow when retirees sell and invest proceeds; and

3. “Rental property developers have started catering to older customers” with amenities like trash pickup and maid service.

Another consideration for seniors is that of leaving an inheritance, says Trulia. “Buying in retirement is only better than renting if retirees care about leaving an inheritance. If retired households don’t care about the equity in their home at the end of their life, renting… is a better option in 98 of the 100 cities with the most retirees.”

Equity is important in valuing homeownership. If it is not a consideration, “the benefits of homeownership compared to renting fall.”

Should Millennials Rent Or Buy?” 

For this cohort, rates are important factors. “Buying a home is 23% cheaper than renting nationwide for millennials and now is the best time to buy since 2012 when interest rates were a tad lower,” Trulia notes.

This fact assumes a 3.85% rate, a 30-year fixed mortgage, and a 25% tax bracket for the buyer.

Millennials do make an impression in real estate. According to the National Association of Realtors, “Millennials Changing Face of America, Heavily Impacting Homeownership.” 

Millennial shifts in behavior will influence “our families, our politics, our entitlements programs and perhaps our social cohesion,” says the article.

Many millennials delay marriage and deal with economic misfortune. Thirty-nine percent reside with relatives.

These facts “have very real effects on homeownership,” and the real estate market feels the pinch as first-time buyers decline from 40% of buyers at 2011 to 32% now.

Still, the median age of first-time buyers hovers at around age 31, an indicator that millennials are “willing to buy if they can in fact break into the market.”

‘The farther away, the closer the home becomes.’ –Dejan Stojanovic, poet

Despite Economic Uncertainty, Buying a Home Remains an Outstanding Investment,” says TheStreet. Real estate remains “a hedge against inflation” and tends to increase in value.

Three reasons real estate will thrive:

1. Property remains “the greatest investment on earth.”

2. Evolving technologies make the loan process easier.

3. Millennials want to own.

Finally, as you think about the housing market and consumer behaviors, keep in mind that market changes influence buyers, and vice versa.

See Zillow’s commentary on “The Evolving First-Time Homebuyer.” Compared to days gone by, today’s first-time home buyer is older, more apt to be single, and more likely to buy a condominium.

Credit scores for these consumers are down. Lenders accept lesser down payments to accommodate need and demand.

Despite lagging incomes, housing preferences for newbie owners are more expensive, and “both the price and percentile… of homes purchased by first-time buyers have risen.”

Price-to-income ratios are up for buyers from 1.5 in the early ‘70s to 2.5 now.

How do these trends affect your business strategies and outcomes?

Per the article, “Understanding what first-time buyers want and what kind of resources they’re bringing to the market is essential in understanding the future of the housing market itself.”

LORA BRAY is an information research analyst for CUNA’s economics and statistics department. Follow her on Twitter via @Bray_Lora and visit the CUNA blogThe Research Roundup: Economic Perspectives.