There has been a lot of handwringing over the future of owning real estate. Many say that the millennials will be Generation Rent. This is both true and not true. In most of the country, if you are planning to stay in a home more than a couple of years buying still makes greater financial sense especially once you factor in tax benefits. Renting however has its appeal especially to a generation that prefers freedom and mobility to the restriction of long term commitment. Many already have one obligation in the form of huge student loans.
When we discuss the rent versus buy conundrum, one of the biggest issues revolves around the mortgage. If all homes were cash purchases home buying would probably win every time. Mortgages and interest rates are what increasingly narrow the affordability gap between buying and renting. Currently interest rates remain near historic lows but that won’t last. The gradual discontinuation of the Federal bond buying program already has caused rates to inflate mildly and its only lingering insecurity about the stock market and the economy that is keeping them down.
Rental rates in some of the countries biggest cities have skyrocketed over the last two years. Millennials currently tend to prefer cities to suburbs and many are flooding to areas where rental inventory is already extremely low. San Francisco and New York have long had situations where potential renters must compete heavily for desirable properties. Los Angeles has seen rents rise dramatically and the city’s affordability index has steadily dropped.
In cities where median housing prices and median rents are both on the rise governments may have to intervene. A recent survey showed that in many major cities, rentals are becoming less and less affordable for the middle class. In Los Angeles there have been movements to consider raising the local minimum wage. It’s a small measure in a larger problem. One of the major problems is lack of housing stock. The housing crisis put the freeze on the building of multi-residential units and that has been slow to thaw. Also builders would much rather create housing stock for wealthy buyers and renters than they would for those on the lower tiers. Government intervention could help make building affordable housing more appealing.
Mostly however, we are using age-old solutions for new world problems. Air BnB has been wildly successful partly because it creates revenue flexibility. As technology changes the ways we live and work, more and more similar services may help create ways to have both the stability of ownership with the flexibility of rentals. For now however, high rents are continuing to impact household formation as many people live at home or in roommate situations waiting, and hoping, for things to get better.