What Accounts for the Increasing Lure of Low-Maintenance Condo Living, and How Should This Affect Your Real Estate Investment Choices
by Karina Gafford
MilitaryByOwner staff writer
I—along with a growing number of other Millenials (Generation Y, Generation Next, or the Echo Boomers)—do not desire the large homes of our parent’s generation. Perhaps the movement away from large homes comes from sheer laziness (and a resulting unwillingness to care for and clean a large space), the placement of a high-value on economy of size that arises from the combination of indoctrinating programming by the carbon-footprint-concerned and Ikea, or a complex amalgamation of these factors. This sentiment is shared among Millenials regardless of our levels of income or education. Millenials eagerly embrace the low-maintenance, urban condominium lifestyles of the retirees about 30-40 years ahead of schedule. So, what happens when an entire generation—one that spans births from approximately 1980-2005—rejects suburban homeownership? Concerned about the resale value of your gargantuan McMansion yet? Read on.
Perhaps Ikea’s 326-foot immaculately organized homes have simply conditioned Millenials to appreciate smaller spaces. Perhaps the pursuit of the perfect career requires today’s young adult to shun the fixed-location of home ownership and pursue a more mobile lifestyle through renting. Perhaps it’s simply a fear of commitment—marrying later, having children later, and renting everything, including laptops and textbooks for school—that discourages Millenials from taking the plunge and getting a mortgage. Perhaps it’s the fact that Millenials saw their parents purchase homes (sometimes many homes) as investments, believing firmly that the homes could only rise in value, but proved the opposite to their children in the Great Recession of 2008. Or, perhaps it’s the fact that a toxic amount of debt—student loans, credit cards, auto loans, and otherwise—financially cripple the ability of Millenials to sequester themselves in a spacious home in suburbia. Either way, Millenials are not rushing into home ownership at the moment, and in fact, a recent Pew Research report shows that Millenials who did invest in homes early on, divested themselves quickly, reversing trends of earlier generations in home ownership.
Millenials Do Plan to Buy Homes…Eventually
While Millenials—affluent and less so, alike—don’t appear to desire suiting up and politely requesting their local bank manager for a home mortgage anytime soon (does that still happen with any generation?), homeownership is still a long-term desire for this generation. This is good news for current homeowners who wish to sell, as Millenials represent the largest generation so far with an approximate population of 80 million. In the meantime, the 64-percent of Millenials over the age of 18 that the Pew Research Report attests do not still live with mom and dad desire vastly different lifestyles than that of the preceding generation. Millenials want to live in high-density, master-planned urban areas where they can live, work, and play—preferably without the need for a privately owned vehicle. Smaller, newer, community-orientated, high speed WiFi connected, and minimal maintenance homes have presented themselves as the residences of choice for this generation.
Transportation Considerations for Investment Homes
What started as a great experiment in master urban planning that mirrored downtown city living (but better organized), the Town of Celebration in Walt Disney World, Florida, in 1996, flourished into a way-of-life for the next generation. Mixed-use commercial and residential living spaces have since proliferated throughout the country, tempting Millenials with their sweet siren song of low-maintenance lifestyles, easy access to food and entertainment, and such close proximity to work and friends that personally owned cars are increasingly looking like a thing of the past. Yes, that’s correct: Millenials, according to a report from the U.S. Public Interest Research Group released in October 2013, generally consider a car as both a burden and a liability, not a yearned for status symbol. Between 2007 and 2011, the percentage of adult Millenial car-owners dropped from 73-percent to 66-percent. According to the University of Michigan’s Transportation Research Institute, the number of young adults with driving licenses has dropped by almost 10-percent since the 1980s, a fact they credit to the increased cost of car ownership. Either bicycles or public forms of transportation—whether in the form of rent-by-the-hour cars, such as Zip Car, rapid transit trains, or buses—can easily serve as the next evolution in the transportation culture in these higher-density, mixed-use neighborhoods. Urban planners in Washington, DC, for one, already envision a time in the not-so-distant future when they can avail of all of the current space occupied by parking garages, turning them into more mixed-use residential neighborhoods that can easily serve a pedestrian population instead. If your investment hinges on your future buyer or renter having a car, you may want to reconsider your purchasing location.
The Somewhat Cyclical Nature of Rural to Urban Migration
Before you plunge your life savings and retirement dreams into the nearest mixed-use urban neighborhood though, there are a few additional items to consider. For one, urban living has a cyclical history. Not so long ago, big companies with factories located in urban cities to accommodate the living needs of their employees suddenly found themselves bereft of skilled employees, forcing them to chase after the educated population of Baby Boomers who had left the city en-masse to pursue the white picket-fence lifestyle. The Brookings Institute reports those same companies (and more), such as AT&T, Motorola, and Sears now find themselves packing up again to chase after the children of those who forced them to flee the city, returning right back to where they started. Keeping the cyclical nature of urban-to-rural development in mind, should the children of the Millenial generation choose to reject the busy urban lifestyles of their parents in favor of the peaceful isolation of suburbia, one could prospectively easily purchase a condominium today and pay off a 30-year mortgage before worrying about any major regional transition in population.
Debt and Savings
Other investment concerns do, however, exist. Young adults carry a lot of debt; not just debt, but high debt to income ratios with minimal liquid collateral in the form of savings to support their debt payments. Approximately 40-percent have student loans while another 40-percent have credit card balances; the student loans alone amount to a combined $1.4 trillion. Then again, Millenials have one great advantage: They watched their parents succumb to the trappings of a consumerist lifestyle only to lose (in many cases) everything—a home, stock values, retirements, pensions, the works. The Great Recession truly proved a teachable moment for Millenials. Given this learning experience, Millenials have already shown a greater tendency to pay off debt and have begun to save at a proportionately faster rate than the previous generation. With financial lessons learned early in life, Millenials have a greater opportunity to make smarter financial decisions when making large investments, such as when buying a home.
Credit Score Considerations
When considering either renting to Millenials or the prospect of buying investment homes to resell to this generation, one must also keep in mind that the average credit rating of young adults hovers around a 630, almost 80 points less than what would qualify them for a good interest rate on a mortgage. A 630 also does not present the most appealing picture of a prospective tenant. One important consideration regarding credit ratings though is that a high credit rating simply means a high interaction with debt, both procuring and repaying; an individual’s credit rating has absolutely nothing to do with the amount of assets that a person has in savings, investments, or retirement accounts. Given that Millenials shed proportionately more debt faster than the previous two generations during this last recession, and will be less likely to accrue new consumer debt, then perhaps future credit requirements for loans may change to accommodate new trends.
Despite the recent housing recession, a full 81-percent of adults—of all generations—do have home ownership as a part of their long-term plans. Given that Millenials have generally put off having children until later in life—whether for educational or financial reasons—than previous generations, the appeal of having a single-family home in the suburbs may emerge. For the meantime, however, the vast majority of Millenials enjoy dog parks over playgrounds. Given the likelihood of a combination of both high interest rates and little to no cash available for a down-payment, it does seem that Millenials will be a part of the rentier class for a while. If you are currently in the market for an investment property, or a home of your own that you plan to rent or sell to the next big market, you may want to keep in mind the attributes Millenials are seeking in a rental home, as it may be a little while before they can buy that property from you. In a following article, we’ll discuss the benefits of the aforementioned low-maintenance, mixed-use urban neighborhoods, and perhaps you just may end up buying a property there for yourself, too!