ARE YOU PREPARED TO PROFIT FROM RISING DEMAND IN RENTAL HOUSING?

3 reasons why demand for rentals remains high

Are you considering adding apartments to your investment portfolio?

This could be a very wise decision, because demand for apartments remains high.

Other people, just like you, have raised this question.  They wonder if apartments are a good investment decision.  They wonder whether demand will remain strong into the future.  After all, demand for other things has fallen off.  For example, demand for 45 rpm records and 8-track tapes has greatly decreased over time.  Even the original iPhone has been replaced.

But, demand for rental housing is remaining strong.  Let’s look at what is driving demand for rental housing.

When you finish reading this article, you will learn three things.  

  1. Demand for rental apartments has been steady for decades.    
  2. Trends with two large demographic groups show continuing and even growing demand in the years ahead.
  3. With expected population growth in America, demand will increase.

BUT FIRST, WHY WOULD ANYONE WANT TO RENT, WHEN THEY CAN BUY?

The advantages of home ownership as compared with renting, seem to scream “Buy!  Don’t rent!”

Common logic says to build generational wealth by owning your own home.  Control your housing.  Grab the tax advantages.  Build equity. Participate in market appreciation.  So many advantages with ownership, it seems.

My wife and I bought our first home in the 1970s when I was making less than $10,000 a year.  We have traded up through the years and are now in our 5th purchased home.  The American Dream of home ownership worked well for us.

We sometimes don’t understand why anyone would want to rent.  But, the more I study people , the better I understand.

Home ownership is out of reach for many American households.  Buying a home is expensive.  Home ownership can be risky.  

Many found this out in the Great Recession of 2006 – 2008 when their homes went “under water” and were foreclosed.  They lost not only the money but also their confidence in home ownership.

About one in three American households have and will continue to choose rent.  It is what makes sense to them.

HISTORIC DEMAND FOR RENTAL HOUSING

Take a look at the following graph.  It shows the percentage of American households who rent, from the years 1965 through 2020.  The data is from the Federal Reserve Economic Data.  

(See https://fred.stlouisfed.org/series/RHORUSQ156N)

Look how steady the percentage of homeownership has been for the past half a century.

You will see 1965 was the year of the highest percentage of households renting their homes, 37.1%.

The lowest percentage of households renting was in 2004 with 30.8% renting.

The average for the years 1965 through 2020, a 55 year period, was 34.75% renting.

Here at the end of 2020, the data says 34.4% of American households are renting.  Tradingeconomics.com projects the percentage who will be renting in 2020 will rise to 35.5%.

The bottom line from the statistics is this:  the percentage of households who rent has been remarkably stable over the past 55 year period.  

The population grew from 199 million in 1965 to over 332 million in 2021, which means the actual number of rental housing units has grown proportionately.  Looking forward, the demand for rental housing will continue to grow as the population grows.

Many of the same factors are at work today as they have been over the last half of a century, namely…

• Not being able to save enough money for a down payment

• Slow growth of household income

• High debt-to-income ratios

• Challenges with creditworthiness

• Low inventories of homes for sale

• Rising prices of homes

Many want to buy, but homeownership is out of reach.  Historically and currently, about one in three households rent their housing.

One of the additional factors limiting the younger generations is the amount of student debt they continue to carry.

Let’s look first at a much older generation, the Baby Boomers, who are renting in higher numbers now than in previous decades.

BABY BOOMERS

Those who study the Boomers note a larger and larger percentage choosing to move from homeownership to rental housing.

From 2007 to 2017, the group of individuals older than 60 who rented rather than owning their homes rose by 43% according to Rentcafe.com.

The Baby Boomers were born between 1946 and 1964.  Therefore, in 2021, they are between the ages of 57 and 75.  It is estimated there are 73 million Baby Boomers alive today.

Many are approaching retirement or already retired.  

Most are at the end of raising a family and are experiencing the “empty nest”.  

They are completing some of the highest earning years of their employment careers and are ready to be free to do what they want when they want to do it.

Many Boomers are deciding to downsize, to take the equity from their current home, obtain some flexibility in where they live, and eliminate the chores of homeownership such as lawn care and maintenance.  

Many Boomers want to travel more.  They don’t want to be tied to their physical home.

Now, be aware, some Boomers did not plan well for retirement.  

John and Judy are among them.  They were caught in the Great Recession of 2006 – 2008 and lost their home.  They are now being forced to retire without adequate net worth or passive income.  They will be renting for years, probably in Class B or C apartments.

The Boomers who are adequately funded for retirement and are choosing to rent prefer the higher end Class A apartments with many amenities, including pools, fitness centers, and planned activities.  

Dave and Linda are among these. They moved into a high rise in the center of Charlotte, North Carolina and are loving the new life they are making with much more flexible, simpler living.

The Baby Boomers will keep demand high for rental properties for years to come. This includes those choosing high end apartment communities and those who need more affordable, Class B and Class C properties.

And the generations following them will likely maintain this demand as they age.

GENERATION X

The generation that follows the Baby Boomers is a smaller generational group.  They were born between 1965 and 1979.  

They will likely follow the pattern set by the Boomers.  Let’s move on to Generation X or the Millennials, one of the largest and most influential generations.

MILLENNIALS

Millennials were born between 1979 and 1995 or perhaps a little later.  They are currently 26 to 42 years of age.  

The number of Millennials alive today is around 75 million.  This is the largest generation in terms of population size.   They are the largest generation in the workforce and have been shaped by the events of 911.  Their world and worldview is so different from the generations that preceded them.

Although they delayed having a family, many are having families now.  They delayed home ownership as well but are buying homes more these days.

Jill and Peter are among those who have recently purchased their first home.  They saved over the past two decades, paid down their student loans, increased their purchasing power, built their creditworthiness and were able to buy a home.

Millennials enjoy a more flexible lifestyle, preferring mobility and convenience.  A higher percentage of them have rented for many more years than their parent’s generation.  

Tony is a single adult, who has held four jobs over the past decade and has lived in three different parts of the country.  This is his lifestyle and he expects it will continue for the foreseeable future.

Some saw the devastation the Great Recession had on their parents.They experienced the way the American dream of homeownership backfired on their families.  Many want to avoid homeownership costs and risks.   

Although currently buying homes, many Millennials are still choosing to rent.  If they are saving, they are increasing their investments in assets other than their own homes.

They will have a big influence on rentals for years to come.

GENERATION Z

Generation Z was born between 1996 and 2015.  They are 6 to 25 years of age.  With the increase of immigration, this generation is on pace to be the largest generation.

They are beginning to move into the housing market and, like the generations behind them, will start by renting.  A number of them are still living at home with their parents.  They are just now entering the workforce.  A high percentage will rent and will likely rent for years to come. 

The economic and social forces that made homeownership challenging for earlier generations will likely continue during their early adulthood.  

Homes are very expensive as compared with earning power.  The supply of homes to purchase is low and will be for a number of years.  Rising student debt means any excess earnings are not being saved for the eventual home purchase.  

This new generation has been shaped by the Coronavirus pandemic.  They can see what unexpected crises can do to an economy and to their job prospects.  They might be more cautious about big, long-term decisions.

Generation Z will keep demand high for rentals for years to come.

CONCLUSION

If you have been considering diversifying your investment portfolio with multi-family or apartment properties, now might be a good time.  

You now realize three things which will influence your decision.

First, the demand for rental housing has been steady over the past half-century.  

Second, the upcoming generations continue to have a high demand for rental housing.

Third, the population of the country will continue to increase.

About a third of the households in America want a place to rent.  As our population grows, the number of rental units will need to grow with it.  Good, clean, safe, affordable housing remains in high demand.  

Are you prepared to profit from rising demand in rental housing?

In a follow-up article, we will look at the supply side of rental units.  Consider the question:  Is supply keeping up with demand?

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