Financial Crisis Yields A Generation of Renters (#GotBitcoin?)
Many young adults are priced out of the housing market. That could reshape their finances—and the economy—for years to come. Financial Crisis Yields A Generation of Renters (#GotBitcoin?)
Alex Ruiz, 29 years old, and his wife, Stephanie Johnson, have steady jobs, are setting aside money for retirement and are slowly paying down their student debt.
Yet buying a house seems out of reach for at least another decade. Home values in Asheville, N.C., where they live, are up some 70% over the past seven years. Their student-loan payments and rising rent have made it difficult to save for a down payment, and the houses that go on the market get snapped up right away.
“Day to day we’re OK generally,” said Mr. Ruiz, a case manager at a government-funded agency. “But the depressing part is when we take a hard look at the possibility of our future.”
For generations, the wealth of U.S. households was built on the foundation of homeownership. That is changing.
Homeownership rates for younger Americans have fallen sharply over the last decade. The median age of a home buyer is 46, the oldest since the National Association of Realtors began keeping records in 1981. Economists, policy makers and mortgage lenders expect the trend to extend to younger generations. The decline illustrates what for many Americans is the real legacy of the financial crisis.
People who came of age in the crisis and its immediate aftermath had no bargaining power when they entered the job market, crimping their earnings ever since. They started adulthood when the housing market was crashing and watched as banks foreclosed on their parents—and decided they weren’t interested in tying their fortunes to a piece of property.
Now, as memories of the crisis fade, they want to buy homes but are finding themselves priced out of the market. Home prices have risen across the board but most steeply among the starter homes first-time buyers can afford, as developers focus on high-end properties where profit margins are higher. The average price of lower-priced homes rose by 64% from early 2012 to late 2018, according to mortgage-data tracker CoreLogic , while the price of higher-end homes rose just 40%.
The effects are already reverberating through the economy. More adults in their 20s and 30s are living with their parents, according to census data, which could make them unwilling or unable to move cities for better jobs. The possibility of rent increases could make them less willing to spend, which some economists believe has already contributed to the economy’s slow postcrisis growth. Some young adults said their inability to buy a home had made them rethink having children, which could exacerbate the challenges created by America’s aging population.
“Lower homeownership for young adults means lower economic growth,” said Sam Khater, chief economist of mortgage-finance giant Freddie Mac . “That’s it in a nutshell.”
Homeownership rates for young people are near their lowest levels in more than three decades of record-keeping. About 40% of young adults, ages 25 to 34, were homeowners in 2018, according to federal data analyzed by Freddie Mac. That is down from about 48% in 2001, when Gen X-ers were young adults. Some economists calculate the decline is actually even steeper.
The crux of the problem: Home prices have outpaced wage gains. From roughly the end of 2000 to the end of 2017, median home prices rose 21% after adjusting for inflation, while median household income rose 2%, according to federal and industry data analyzed by Freddie Mac.
Some of the drop in homeownership is a matter of preference. The financial crisis made today’s young adults averse to debt and risk, lenders say. That means they might be willing to spend on daily luxuries but not to tie up the bulk of their money in a mortgage.
Millennials aren’t making up for lost home equity in other investments. The median net worth for young families plunged by nearly a third from 2001 to 2016 after adjusting for inflation, according to the Federal Reserve.
Even if millennials soon start buying homes en masse, as some banks and mortgage lenders predict, there are consequences to buying late. A recent report by the Urban Institute examined homeowners who turned 60 or 61 between 2003 and 2015. Those who bought their first home between ages 25 and 34 had median housing wealth of about $149,000. Those who waited until ages 35 to 44 had half that.
The effects of not buying, or buying late, should become more clear as millennials enter new stages of life. The median family net worth of homeowners is more than $230,000, according to the Fed, compared with $5,000 for renters.
Without home equity, people are less able to weather job losses or unexpected medical expenses, and less able to start small businesses. Baby boomers could find that when they want to downsize, there are fewer buyers because younger adults never built up equity in a first home. And decades from now, millennials might have to keep working well into retirement age.
“Jobs are plentiful, the economy seems good, and lenders are going to look at this and say, ‘Everything’s great,’” said Brad Blackwell, who recently retired as head of housing policy at Wells Fargo & Co. “But they should take the long view.”
In Philadelphia, Nate Baird and his wife have set a goal to buy a home next year, before their son starts school.
Mr. Baird, an emergency-preparedness planner, took a second job teaching at a local university to earn extra income to save for a down payment and pay off student debt.
“We’ve thrown ourselves into working,” said Mr. Baird, 33. “It’s a trade-off.”
Though mortgage rates are low, that matters little when home prices are rising faster than income. Increasingly, the young adults who can afford homes will be those whose parents can help with a down payment, economists and lenders said.
Elysse Lane and her husband finished business school in 2016 and wanted to live in the San Francisco area, where she had a job offer and family. They moved to Austin, Texas, instead, in large part because buying a home in California seemed impossible.
But the market in Austin is crowded too. They have put offers on three homes but lost to other bidders. One small comfort: They don’t really feel out of place. Many of their friends are in similar situations.
Security Deposits Are the Bane of Many Renters. Lawmakers Want to Change That
They rise just like rents. Is insurance the solution?
A growing number of legislators are trying to eliminate a practice that has prevented many lower- and middle-income people from renting an apartment: the steep, all-cash security deposit.
With low-cost housing hard to come by in many states, state and city lawmakers are introducing bills that would give younger renters and others strapped for cash the choice to replace security deposits with insurance policies or installment plans paid overtime. These payments are usually equivalent to one or two months’ rent, which landlords require as a guarantee against damages.
Cincinnati on Wednesday became the first U.S. city to require that landlords accept alternatives to a cash deposit, including payment plans and insurance.
New York state lawmakers recently passed a measure limiting deposits to no more than one month’s rent. A member of the Virginia House of Delegates submitted a bill to give tenants options for how they pay deposits last week. Legislators in Connecticut, Alabama and New Hampshire say they plan to introduce similar bills.
Laws to ease costs associated with security deposits are part of a growing effort by lawmakers in a number of states to address the shortage of affordable housing and rapidly rising rents. Over the past year, California, New York and Oregon have introduced new limits on rent, while others have enhanced protections against evictions.
Average rents rose 36% nationally over the past decade, though rents rose more than twice that amount in hot markets such as Denver and Seattle, according to data provider Yardi Matrix. About a quarter of American renters pay 50% or more of their income in rent, according to listings platform Apartment List.
Many landlords are already pushing back against the security-deposit legislation. They say collecting all-cash security deposits at move-in is necessary to protect their assets and make sure a tenant doesn’t skip out without paying the last month’s rent.
Lawmakers sponsoring the bills say many renters can be effectively priced out of a market—even if they can afford the monthly rent—if they are unable to produce these large cash deposits.
Renters often use savings to pay a one-time deposit on top of the first month’s rent, but survey data suggests it could be a stretch for many Americans. The typical middle-income household has only $3,000 in liquid assets, according to a recent analysis of bank accounts and transactions by the JPMorgan Chase Institute.
“For a significant number of people living in Cincinnati, a security deposit for a two-bedroom would equal or exceed the totality of their savings,” said Cincinnati City Councilman P.G. Sittenfeld, sponsor of Cincinnati’s new deposit law. “To put down $1,000 up front, that’s a significant expense for some people.”
Proponents also say the new deposit rules could free up billions of dollars to help stimulate local economies.
“We’ve been looking for any and all options to allow our workforce families to continue to live here,” said Ryan Coonerty, a district supervisor in Santa Cruz County, Calif., who supports deposit legislation. “If you can get a couple thousand dollars in people’s pockets, that can make a big difference.”
Some landlords already allow tenants to use insurance instead of a security deposit. In the most common arrangements, a renter pays a small, nonrefundable monthly fee or a one-time payment to a third-party company. That company then strikes a deal with the landlord to take responsibility for certain damages or claims at the end of a lease.
Sarabeth Flowers Lewis, a 27-year-old freelance copywriter in Austin, used a company called Jetty, which charged her and her husband 17.5% of one month’s rent to take on the responsibility for the deposit, when she moved to a new apartment with a home office this month.
“I’m waiting for our security deposit from our last place. I have to manage that. I have to worry about it. And it’s not like I’m guaranteed to get that money back anyway,” Ms. Lewis said.
Still, these alternatives also have a downside. They could create a net loss for tenants who might otherwise receive their entire deposit back at the end of a lease. Some cover the move-in cost, but if the landlord later wants to make claims for damages, that charge is the tenant’s responsibility.
To address some of these concerns, the Cincinnati bill requires that insurance providers be approved by the state, offer monthly premiums and provide coverage for the entire lease term.
Landlords also say that insurance plans would likely leave them fighting with these companies for claims, when they would previously have the tenant’s deposit already in hand.
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“Now I’m in a whole different realm,” said Charles Tassell, chief operating officer of the National Real Estate Investors Association. “I’ve got to deal with an insurance claim and get my attorneys involved. And they’ve got their high-priced attorneys in-house.”
Cincinnati’s bill included a compromise, allowing landlords to offer installment plans of at least six months to tenants, instead of just insurance plans.
Ankur Jain, co-founder of the company Rhino, sells deposit alternatives that he said cost renters an average of $5 a month on a $1,000 cash deposit. Mr. Jain estimates that the new Cincinnati law could return as much as $100 million that would otherwise be locked up in deposits back to the city’s tenants.
“Giving renters more options for how to save money and how to choose to manage their finances I think is a huge win,” Mr. Jain said.