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Why Are More People Choosing to Rent over Buying Homes?

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Homeownership is so quintessentially American, one of our most beloved holiday traditions involves watching George Bailey, loan officer, discover that if he weren't around to build houses, his beloved little town would be a swamp of vice. Yet that may be changing. A 2018 study found that only 38% of Millennials think buying a home is a good investment, and vast majorities state that renting is cheaper than owning. What's behind the shift?

Millennials Aren't Buying

Many Millennials entered the job market right around the Great Recession, and dpending on what metrics you use, it's never completely ended for them, as wages are still recovering. Besides, it's hard to tell somebody a house is a good investment when they've seen that it can rather dramatically go sour. Add in the ever-present student debt to pay off, and buying a home begins to seem like more fiscal trouble that it's worth.

The flip side of this, however, is that, statistically, Millennials are making smarter decisions elsewhere, such as saving more of what income they do have for retirement. That's good in the long term, but it does mean that saving up a down payment, or assuming more debt, isn't part of the plan.

Boomers Aren't Budging

Nor are there many homes for Millennials to buy in the first place. Boomers are increasingly choosing to “age in place,” instead of selling their homes. This bottles up the housing supply, especially “starter homes,” so Millennials that can afford a home are increasingly just sticking with their apartments until they can afford the home they'll live in for good.

Paired with an overall undersupply of housing, this has hit every market where it hurts. They neither have enough rental properties or sale properties to meet demand, and a complicated mix of zoning laws, voter resolutions, and the overall cost of building housing means neither supply is going up meaningfully in the near future. So what does this mean for the housing market?

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Following The Fundamentals

Nobody's gone wrong building housing in areas with a lot of demand, but in order to determine whether it should cater to the rental markets, or building units to sell, it pays best to think about the future.

For any region, start with the numbers. Who's moving in? Who's moving out? How has inventory been shifting over time, and where's the greatest demand?

The next step is to consider the political aspects. For example, several localities such as Minneapolis and Boston are making major changes to their zoning codes to address endemic housing undersupply, which can be an opportunity for certain types of investment. However, it may mandate other changes, such as “all-electric” construction, to be aware of when considering building a rental property.

There will always be a demand for housing, yet that demand will change over time. Millennials may view their house as a simple sunk cost, not an investment to be sold every decade. That will have far-reaching effects in every market, and beyond, that investors will need to plan for.