If you’re thinking that you can’t get ahead, you’re right. Rents, according to a Reuters story quoting Reis Inc., a firm that tracks real estate data, just posted their biggest jump in four years.
Landlords are taking advantage of declining vacancy rates of 4.9%, the lowest in a decade. But the most surprising fact in the new study isn’t that there are a lot of renters (after all, millions of Americans have been hit by the real estate crash, and people whose homes have been foreclosed upon have to live somewhere). Rather, it’s that there appears to be a new source of rental demand: young people.
(MORE: The Jobless Generation)
This looks like a reversal of the recession story of college graduates headed back home to take over their old rooms and their parents’ basements.
Real estate observers and economists call the phenomenon “household formation” — a teen or 20-something living with parents is one household, and when the said teen or 20-something moves out into the world, even with roommates, that’s another household. Historically, household formation would drive housing demand — sometimes in big waves, as for example, when the baby-boom generation needed homes of its own.
But during the recession, those young people stopped consuming separate housing and instead boomeranged back home. As Robert Denk, an analyst with the National Association of Home Builders, noted in a widely circulated 2011 paper: during the slump years 2007-09, household formation dropped down to a third of their long-term average.
One could theorize that those young people probably wanted their own homes, but with the dismal economy, they made the decision not to pursue them.
Now it looks like that household demand is increasing. One census measure — occupied housing units — jumped 1.5% last year over the year before.
Of course household demand can come from different places: if a married couple gets a divorce and each take separate living quarters, household demand has increased. But supporting the theory that the demand is bubbling up from the young is the fact that the millenials, as this generation is known, are oh-so-slowly getting jobs.
For example, unemployment among those ages 25-29 years old has fallen from a May 2010 peak of 11.2% to 9.9% in February 2012. (Check out this great chart from the Philadelphia Inquirer here.)
What does that mean for the housing market? Well, for starters, it should push more buyers into the system. As more of the millenials compete to rent, that pushes rental prices up, which makes some renters look more favorably toward buying. It’s tough to predict what the ratio will be — will every 10 new renters create one new buyer? Two? Five? — but it’s clear that demand for owner-occupied housing, which has been slack for five years, is poised to swing up.
This won’t happen all at once; I have previously compared the foreclosure mess to cola spilled on the floor, and the spill is extensive, especially in hard-hit states like Arizona, Florida and Nevada. But every young person who moves away for their parents is like one more paper towel, and the supply will get absorbed.
Denk, reached via e-mail, notes that “lots of forces” come into play in the home-buying decision: “Vacancy rates in both rental and owner stock, rents vs. house prices, interest rates, incomes, etc.”
But he also notes that in the year since he wrote the paper about pent-up housing demand, that demand has jumped by another 500,000 people who would like to form their own households.
My guess is that some of that demand gets released this year, and even more in 2013. And when that happens, we could see what we’ve been talking about for years: a strong housing recovery.