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PCBB Banc Investment Daily October 03, 2014
Banc Investment Daily
October 03, 2014

To Rent Or To Own

We've followed with some interest the rise of the rental economy, much of it powered by internet-based communication between people who otherwise would never be able to find one another. Airbnb brings people with a spare room or apartment space together with those looking for short-term accommodation. Uber helps people needing a ride and unable to find a taxi. Beyond short term rentals and car shares, people are renting designer gowns for prom night, along with tools and numerous other items. It all carries risk of course, especially in that it entails doing business with strangers, but it's made sense in the economic downturn for people to look for ways to spend less money. There is also logic in sharing seldom-used items versus acquiring them, or in generating income from unused space. There is also a cultural move to value experience over possessions, so this is particularly appealing to younger consumers.
At the same time, we read business articles that express concern about younger consumers not purchasing homes as they have in the recent past. It's speculated that a primary obstacle for first-time home buyers may be the higher down payments required by banks. Research finds the median down payment for a home in the lowest 25% price-range hit a low of 3.1% in 2006. From 2001 - 2007, the median down payment for that sector was 4.2%. What happened next is in the history books. Home prices declined far more than the amount most borrowers had put down, many buyers ended up upside down, owing far more than their home was worth. If they needed to sell their home for any reason, either they took huge losses or many simply walked away. Last year, the median down payment for the cheapest 25% was 7.5% or around $9,500. While the home affordability index has dropped, it is still around the same level as late 2008 and this seems pretty reasonable to us. After all, home buyers who have put down 7.5% have more ability to absorb a market downturn.
Further analysis finds that first time home buyers have historically made up about 40% of existing home sales and admittedly the current number is lower (around 28%). This has pushed down the percentage of home ownership to the lowest in 20Ys. There is concern that the economy cannot fully recover unless younger buyers in greater numbers enter the market and that the trend of lower home ownership fundamentally weakens the foundations not only of the housing market but of the economy as a whole. The other side of the fence is that when people buy a home they cannot fully afford and borrow too much, it puts the whole economy at risk. Many young professionals are earning less due to stagnant wages and also carry high student debt levels, so a lower level of home ownership makes sense given this context.
Finally, consider that given the state of the economy, buying a home early in a career may be a less advantageous strategy. Since employment is still tepid in many places, and especially given the difficulty in finding quality jobs, it may make sense for younger people to not tie themselves down or increase their debt. Home ownership also means they lose flexibility to relocate early in their careers. As such, many younger people are deciding it is more advantageous to rent than buy a home until their economic picture becomes more certain.
Owning a home is considered a time-honored path for building wealth. However, the young consumer's preference to rent rather than own--be it a formal gown or a home--likely reflects more than a generational trend, but a reflection of the economic times.