Millennials are Fueling a Rental Boom, But When Will the Tide Turn?

United States, December 15, 2014 (Newswire.com) - During 2000-2010, number of millennials nearly doubled in central city neighborhoods of the Philadelphia-Wilmington-Camden metro area, according to an October report from think tank City Observatory. But younger adults aren't interested in owning homes, according to recent Pew Charitable Trust research. The no. of homes owned by Philadelphians age 25-34 fell 26% from 2000-2012, although the total population in that age group increased and real wages have declined. Median income in 2006 was $33,169, while in 2013 it was $30,759, a loss of 7.25 percent, said Phil Marchese, senior VP, wealth management, Morgan Stanley in Center City.  "They have high student-loan balances, and that doesn't put them in a position to be buyers", he said.

Houwzer, a start-up founded by Michael Maher, CEO of Benjamin's Desk, hopes to play this trend by competing with brokers such as Berkshire Hathaway Home Services Fox and Roach and Redfin to ease millennials into their first purchases. "We will list homes for free and remove 3% commission, so we essentially represent buyers for free," Maher said. Houwzer is in the process of hiring agents and building the business. Millennial buyers are struggling with higher prices, tighter mortgage-lending procedures, and a still-unsteady job market. According to National Association of Realtors data, just 33% of home purchases this year were made by first-time buyers, down from 38% last year and well below the long-term 40% average. Maher said: "We're really bullish on the market despite what people say. Yes, millennials are wired to rent and be mobile. But when they have families, they're going to think about buying."

Don Ganguly, cofounder and CEO of HomeUnion, founded the online real estate investment management firm in 2011 to help investors monetize the rental trend amongst the young. Institutions "have only bought about 250,000 properties. There are about 14 million properties" out there, he estimated. HomeUnion specializes in single-family rentals (SFR).

"Millennials are beginning to form new households, but unlike past generations, that doesn't mean buying a starter home," Ganguly said, citing a Nielsen study showing that millennials account for 43% of current heads of household who intend to move in the next 2 years. Because millennials represent 27% of the U.S. population, "this bodes well for the future of the SFR market," he said.

"We're trying to solve two problems," Ganguly said. "People want to invest in real estate, but they don't know how”. Instead, HomeUnion finds the properties remotely and insists the rent must equal at least 1% of the home price. Returns can total 5-9% annually, he estimated, noting, "Your money goes further, and you're not dependent on one tenant”. HomeUnion also makes money: "We charge an asset-servicing fee, and when they sell, we make a transaction fee."

Will this trend in home-buying behavior last? Mortgage applications indicate that few new buyers are entering the market, and that they are at their lowest number since 2000. Don Frommeyer, CEO of the National Association of Mortgage Professionals, said that the gap between buying and renting is widening and the rental market as a whole has seen a boom in recent years. "Despite mortgage rates remaining low, buying a home isn't as big of an objective" for millennials as it has been for other generations, Frommeyer said.