Millennials and Housing – The Response
- Joshua M Brown
- December 10th, 2012
My friend David, an advisor in the Dallas area, read my post this morning in which ConvergEx's market strategists explain why the millennial generation hasn't yet embraced homeownership. Below is his response, which I believe will resonate with many people of his age group...
Regarding millennials and housing, a group and topic that I feel imminently qualified to discuss as I’m 27 and have recently moved, the four points you make in this post are a good start. I would add the following:
1. Many qualified younger buyers are in industries/on career paths that move frequently. My wife and I recently moved to Texas for her job on the management track at a manufacturing company. Her job will move her within 3 years, unless she works hard enough/lucks out enough to skip a step in the promotion chain. That next location could be anywhere from Colorado, Texas, Ohio or Singapore. In our position, why take the risk that liquidity is a major problem when we have to move? We’re paying a 5% premium to rent in this environment for a liquid housing situation. We’ll have more visibility on our situation in a year, but any property acquired would likely have to be a desirable rental property once we are done with it.
2. The long-term real return of housing according to Shiller’s work is something like .06% annually since the start of the 20th century. Why get embroiled in a highly-leveraged investment vehicle with limited liquidity that displays such a paltry real return, especially when prices aren’t as bottomed out as they were 18 months ago?
3. I am much more comfortable devoting excess cash to funding an emergency fund, building retirement balances and other savings.
4. This may be a personal thing, but I still am very pumped that I can call my landlord when the furnace goes out.
5. My wife and I would prefer to spend any excess money we have on travel and/or new experiences, rather than making our rental into a ‘home.’ We don’t really need/want more ‘stuff’, or to be spending the time it takes to take care of said ‘stuff.’
6. The student loan thing can’t be overstated. I’m fortunate to be able to aggressively pay down these debts, and I think a lot of people in a similar position are pre-paying the loans, as it offers pretty great guaranteed returns. Student debt carries high-ish interest rates (depends on when you were in school, I have rates from 2.3% to 8%), and importantly cannot be discharged in bankruptcy. Combine high interest costs with diminished median wages and employment levels, and you have a toxic combination that many can’t wait to ameliorate.
I could say a lot more on the topic, but I think it boils down to liquidity, better returns elsewhere, and a high potential that we will migrate more than our parents. Also, I’m not completely sold on the idea that we’ve moved past the concepts that got us into the housing crisis in the first place, namely the continued high levels of capital and credit allocation to housing in spite of the aforementioned weak real returns.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.