Crucial Millennial Home Buying Trends
The millennial generation is a controversial one. They have earned a reputation for being excessively politically correct snowflakes, spoiled children with poor attention spans and weak work ethic. But they are also far more conservative than their parents and grandparents. They spend less and save more, drink less and plan more. They are the motivated inventors of the side-hustle. And their concerns are far more global, as they are more concerned with health and ethics than prior generations. Understanding millennials and, in particular, millennial home buying trends, necessitates an understanding of the millennial mindset.
This complex generation has already entered the field of real estate en masse, and will only continue to do so. Thus, it is important for everyone in the field of real estate to understand how this generation thinks to understand millennial home buying trends. This week we explore the millennial mindset and the implications it has for the future of millennials in real estate.
Millennials: A Financial Profile
Millennials came of age, and thus formulated most of their thoughts and attitudes about money, during the recession of 2008. Thus, they are far more financially conservative than the two generations preceding them. Critical of luxury and materialism, millennials tend toward minimalism and would rather save than spend. It is estimated that over 40% of millennials have at least $15,000 in savings! Their ability to save may be due in part to their inclination to forego having children.
As the job market is improving, the financial state of the millennial population is improving. Not only are millennials saving more; they are earning more than prior generations. Today, millennials comprise the largest constituency of the work force.
However, millennials aren’t exactly rolling in the dough. Though millennials may be making more money and spending less of it on children, they face financial constraints that their parents and grandparents did not. These heavily influence millennial home buying trends. Perhaps the most significant financial strain on millennials is debt. The average millennial possesses over $37,000 in debt. Thus, millennials may be choosing to have fewer children to divert financial resources to loan payments. Because millennials are so indebted, they also possess significantly lower credit scores, making it more difficult to invest.
Millennials As Investors
Over the last 50 years, real estate has outperformed the stock market by an astounding ratio of approximately 2:1. Being the financially savvy and conservative individuals they are, millennials prefer investing in real estate to stocks. Real estate is not only a more stable, illiquid investment; it is also completely tangible, and it therefore feels more stable and controllable to millennial investors.
The proof that millennials prefer real estate to stocks is in the numbers. Millennials are 52% more likely to invest in multifamily properties than their two preceding generations. Millennials purchase property for passive income at a rate 1.5 times than of the baby-boomer generation.
However, millennials actually face greater barriers to investing than baby boomers and generation X. Because millennials have so much debt, they typically possess lower credit scores, averaging around 650. That means greater difficulty obtaining a loan. Furthermore, millennials are famous for the “side hustle,” or an extra part-time job alongside a full-time one. That means millennials are working extra hours just to make ends meet. And though the extra work may inadvertently increase their credit scores, it leaves them with far less time to buy a house or manage a property.
Millennials and Short Term Rentals
Short-term rentals may be particularly appealing to millennials for the aforementioned reasons. Though they may not be able to invest in a buy-and-hold property, millennials can and do rent out rooms or parts of their properties on platforms like Airbnb. As the first generation of digital natives, millennials are poised to do so. They are familiar with short-term rental sites, and it’s easy for them to operate the rentals remotely from their phones.
Of course, that doesn’t mean that millennials are neglecting home buying entirely. Indeed, millennials made up almost two-thirds of first time homebuyers in 2017. Considering a greater percent of the population is investing in real estate than previous generations, we can logically infer that a good number of these homebuyers were actually investors. Many millennials do successfully operate their own buy and hold operations. But, because platforms like Airbnb make it so easy to run vacation rentals, which generate significantly more income per night, we predict that investments in property for short-term rentals will rapidly increase as these digital natives enter the market.
What Are the Millennial Home Buying Trends?
What are some other millennial home buying trends? As we have mentioned, millennials are more likely than previous generations to rent later in life. That’s because they often work remotely or travel frequently. But it is clear that a lot of millennials are still buying homes.
We often forget that being a renter doesn’t mean that you can’t also buy a property for the sake of investing. In fact, 7% of millennial renters have invested in real estate other than their primary residence. Doing so is easier for this generation because they have the capacity to manage these properties from afar using digital technology. Oftentimes millennials will rent in expensive urban markets close to their jobs but invest in outlying areas with more profitable market dynamics.
Plus, if investing for the sake of short term renting, millennials need not worry with family appeal. Size and functionality are often less essential for short term renters than comfort and location. Thus, with their characteristically low credit, millennials may find it more feasible to invest in small, short-term rentals than large homes.
Finally, millennials are more motivated by ethics than by profit, unlike baby boomers and generation X. Millennials are thus far more likely to invest in ways that will actively benefit their tenants and the surrounding community. That means more interest in affordable housing, or fixing up properties in run-down, crime-ridden areas. Millennials are likely more inclined to invest in subsidized or eco-friendly housing operations.