Young professionals are staying in cities. What does that mean for homeownership?
Young, educated, professionals are flocking to urban neighborhoods across the country on an unprecedented scale, and increasingly they’re choosing to rent. In NYC, where rentership has always outpaced homeownership, a total of 69% of residents are renters, versus 66% in 2005. But this trend is true across the country.
According to research done by Trulia, the share of U.S. households that rent increased from 36% in 2006 to 41% in 2014. This increase in renting was even larger among Americans between the ages of 26 to 34, rising by a whopping 11% between 2006 to 2014 to above 72%.
Despite the fact that city rents nationwide are now close to $500 a month higher than their suburban equivalents, millennials are choosing to stay in cities. It seems the U.S. has gradually shifted away from its decades-long obsession with suburban homeownership and toward a greater role for renting in cities and urban areas.
At Common, we understand the factors keeping millennials away from the suburbs. For this post, we asked our real estate team to take a deep dive into explaining why people are choosing to live in cities and are increasingly choosing rentership over ownership.
The urban draw
Job growth, declining crime in cities, young professionals waiting longer to get married and have children, and even easy access to great pizza, are all factors that contribute to young people choosing to stay in cities. Most importantly, it’s a more permanent generational shift in tastes and spending habits that’s keeping young professionals out of the ‘burbs.
According to a recent study done by Forbes, millennials are attracted to amenities, community, and flexibility. Clearly, cities offer plenty of those good things. Millennials are also looking to live lives less dependent on driving.
In fact, millennials are leading the charge away from commuting by car and towards alternate modes of transportation, including public transportation and walking. Indeed, workers ages 16 to 24 are commuting the least by car compared to all other age groups. As a result, millennials (currently the largest generation in the U.S.) are more likely to want to live in urban and walkable neighborhoods.
Priced out of the market
The trend is clear: young people are moving to, and choosing to stay, in cities. Demand for housing in America’s cities is stronger than it’s been for decades. To illustrate, the population of NY grew by approximately 100,000 people last year, whilst only 25,000 new units were added to the market.
It’s no surprise that the average price per square foot of a condominium or co-op in Manhattan has increased from $328 to $1,645 between 1997 and 2015. Urbanites in their 20s, 30s, and early 40s across the country are simply priced out of the market and as a result renters outpace buyers by substantial numbers.
Lower purchasing power
To make matters worse, Generation Y is the first generation in American history to have less purchasing power than its predecessor. Millennials are facing an unemployment rate of more than 8% and $1 trillion in student loan debt.
What does this have to do with homeownership? Well, say you want to buy a share in an NYC co-op. To do that, you’ll need to prove a few things first.
First, prove that the actual cost of the mortgage that you hypothetically will have, plus the monthly maintenance and basic housing cost, is less than 25% of your total income. On top of that, NYC co-ops require that buyers have the equivalent of at least two years of housing costs (maintenance, common charges ,and taxes) in their bank account after the purchase.
Conclusion: simply find a nice rental, because owning a place of your own in NY just isn’t in the cards anytime soon; and LA, DC and SF are no different.
Renting vs owning
Truth be told, for a growing number of renters in post-financial crisis America, it’s not the tighter mortgage lending rules, the high property prices, or the lower income that’s leading them to put off homeownership. For those individuals, renting means being able to live a more carefree lifestyle.
It means having the freedom to move with little notice and having the right to call someone else to fix your leaking radiator (while you go out for a coffee with a friend). For those people, homeownership is viewed as a risk and a weight on one’s shoulders. Likely they will buy their second home first and live in a Common Home until they do.