Millennials Should Be Happy They Are Stuck Renting




 

(Bloomberg Opinion) -- Millennials spend a lot of time bemoaning their inability to buy a home, forcing them to keep renting. They should want to stay renters, if they know what's good for them financially.

It's generally believed that appreciation in home values is what created middle-class wealth in earlier decades. But that was only because monthly loan payments forced homeowners to save and eventually retire their mortgage debt. Most of the rise in single-family house prices over time is due to larger new structures with more marble bathrooms, fancier kitchens, etc.

The quality-adjusted house price index, developed by Prof. Robert Shiller of Yale University, removes this upward price bias by comparing the prices of the same house when it is sold repeatedly over time. It shows that average quality-adjusted single-family house prices, corrected for overall inflation, have risen a paltry 1.1% at a compound annual rate since 1972. The reason the results have an upward bias at all is that they don't adjust for interim owners doing upgrades.

But then there's the mortgage rate offset. Since 1972, 30-year fixed-rate mortgage rates in real terms have averaged 4.1%, meaning it has cost the homeowner 3% per year to own a house before taxes, maintenance, utilities and insurance. That's a real negative return. No wonder only about a third of millennials owned their homes in 2016, compared to half of Generation X at a similar age in 2001 and half of Baby Boomers in 1989. The homeownership rate for people under 35 has declined by 7.2 percentage points from a peak of 43.6% in mid-2004 to 36.4% in mid-2019, steeper than the 5.1-percentage point drop from 69.2 to 64.1 in the total rate.

To be sure, millennials do face financial strains not encountered by previous generations. According to Federal Reserve data, Millennial households in 2016 had an average net worth of $92,000, or 40% less than Generation Xs at the same age and 20% less than Baby Boomers in 1989. Many millennials, born between 1980 and 1996, entered the workforce during the Great Recession or shortly after at low pay, and history suggests they'll never catch up. When the unemployment rate jumps five percentage points, as it did then, cumulative earnings fall by 10% over the first decade of a new employee's career.

Some millennials were caught up in the subprime mortgage boom and collapse, and remain scarred by it. They believed they could buy houses with no money down and never shell out a dime because continuing rapid appreciation would allow for continual refinancings. So the bursting of the subprime mortgage bubble and subsequent one-third decline in house prices was a rude awakening, especially since it was the first nationwide drop in values since the 1930s.

In the aftermath, mortgage lending standards have been dramatically tightened and millennium incomes and net worth growth weak. So by choice or necessity, many millennials are renters. Since the housing collapse, multi-family housing starts, mostly rental apartments, have surged past their previous 300,000 annual rate level to 340,000 in September. But single-family starts, after nosediving from a 1.82 million annual rate in January 2006 to 350,000 in March 2009, have only revived to 920,000, well below the long-term average of 1.2 million. Also, investors have bought huge quantities of single-family houses and converted them to rental units. Last year, investors bought 20% of houses in the lowest one-third price range, up from the 15% average. These are abodes that first-time home buyers normally purchase.

Many millennials are accepting their fate. A new Freddie Mac survey found 24% of renters "extremely" unlikely to ever own a house, four percentage points lower than four years ago. Some 82% said renting is cheaper than buying, 15 percentage points higher than in February 2018 even though at $1,008 a month average as of the second quarter, rents nationally risen 20% faster than inflation between 1980 and 2016.

The trend toward renting over owning own should persist and may even increase. I continue to favor investments in rental apartments-assuming, of course, they meet the location, location, location test.

To contact the author of this story: Gary Shilling at agshilling@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation." Some portfolios he manages invest in currencies and commodities.

For more articles like this, please visit us at bloomberg.com/opinion

©2019 Bloomberg L.P.

COMMENTS

More Related News

Ten Thousand Day Traders an Hour Are Buying Tesla Shares
Ten Thousand Day Traders an Hour Are Buying Tesla Shares

(Bloomberg) -- Robinhood users can't get enough of Tesla Inc.Almost 40,000 Robinhood accounts added shares of the automaker during a single four-hour span on Monday, according to website Robintrack.net, which compiles data on the investing platform that's much beloved by day trading millennials.The one-day return may not have turned out so well. Tesla was up as much as 16% at one point before paring gains through the day and finishing 3% lower. It was a rare losing day for the high flying stock, which has surged 56% over the past 10 days.All told this year, Tesla's market cap has surged by $202 billion, pushing Elon Musk past Warren Buffett in rankings of the world's wealthiest people and...

Stocks Decline After Reaching Covid Crash High: Markets Wrap
Stocks Decline After Reaching Covid Crash High: Markets Wrap

(Bloomberg) -- U.S. stocks declined after the S&P 500 briefly touched the highest level since the coronavirus pandemic sent markets tumbling worldwide in March. Crude oil also turned lower.The main U.S. equity index stumbled in afternoon trading on signs the virus was throttling reopening plans in states like California. An increase in tensions with China also damaged sentiment. The measures had almost reclaimed a gain for the year before stumbling. It's still down almost 7% from a Feb. 19 high.The volatility in the S&P also corresponded with prices swings in Tesla Inc., which is in the Nasdaq Composite. The Nasdaq hit another record high before closing in the red. The Dow Jones...

Moderna Jumps as Analyst Sees Over $5 Billion Vaccine Sales
Moderna Jumps as Analyst Sees Over $5 Billion Vaccine Sales

(Bloomberg) -- Moderna Inc.'s experimental vaccine for Covid-19 could generate sales of more than $5 billion a year, Jefferies analyst Michael Yee said, initiating the stock at a buy.The shares jumped as much as 5.6% in Monday trading after the bullish review. A more than 230% surge for the stock since the start of the year has split Wall Street as to "what will happen or if the vaccine will even work," and investors are "hugely divided on valuation," Yee wrote in his note to clients."We believe the Street will be surprised to the upside if the Covid-19 vaccine works, gets approved by early 2021, and there are multi-billion dollars of purchase orders from USA and around the world," he...

Papa John
Papa John's Hits Record as Chain Moves Past Schnatter Turmoil

(Bloomberg) -- Papa John's International Inc. shares hit an all-time high, a sign the company has recovered from the controversy generated by its former chairman.The pizza chain's stock rose as much as 2.4% to $90.96 in New York, surpassing the previous intraday high set in December 2016. The shares

China to Sanction U.S. Senators Rubio, Cruz Over Xinjiang
China to Sanction U.S. Senators Rubio, Cruz Over Xinjiang

(Bloomberg) -- China announced sanctions against U.S. officials including Senators Marco Rubio and Ted Cruz, in a largely symbolic retaliation over legislation intended to punish Beijing for its treatment of ethnic minorities in the Xinjiang region.Chinese Foreign Ministry spokeswoman Hua Chunying said

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Economy