The Boomerang Generation – Are they ready to rent?

Boomerang Generation

With the rental market still in recovery mode since the recession real estate managers are wondering when the biggest traditional source of new households – Millennials – will be returning to the market in a significant way. Millennials, those born after 1980, have been hit hard by the economic downturn and there are fears that, having been burned financially in recent years, they are either unable or unwilling to rent. Those who ran to their parents’ nests during the recession potentially represent a significant source of available revenue for the apartment industry. The trick however, is getting them to leave home, somewhere that has the advantages of being cheap, cozy and convenient.

The financial downturn prompted a reversal of the long-standing trend towards moving into rental accommodation. According to reports in the Washington Post the rate at which Americans set up their own homes was cut by more than 50 percent. One of the principal reasons for this were financial in nature. It is estimated that an incredible 83 percent of young adults that returned to the family home during the recession did so to ease financial hardship. Notwithstanding a recovering economy that has seen the jobless rate for 25-34 year-olds fall from 9.2 percent to 8.6 percent over the past twelve months, the rate at which new households are being formed continues to be sluggish according to Census Bureau statistics.

Estimations of the number of Millennials who have not enter the rental market has been put at 2.4 million individuals. This is an incredibly large figure that is standing at the periphery, on the verge of entering the rental market. The 2013 Current Population Survey data suggests that of these “missing” households, 31 percent are young adults aged 18-34 who are currently living at home with their parents. Developers are aware of the statistical data and are pushing ahead with construction plans, in the expectation that these young adults, sometimes also known as ‘Generation Y’, will shortly form their own households. However, their entry into the market is not inevitable and certain elements need to be borne in mind that may cause delays, albeit of a temporary nature.

One of the largest portions of these missing households (44 percent) were the unemployed who may have lacked the financial means to establish their own households in the past, either by renting or purchasing. The job market has been steadily (but slowly) improving with the unemployment rate falling from a high of 10.0 percent in October 2010 to 7.0 percent in November 2013. This improvement would suggest that the rental market is due to see an upsurge. However, while demand is likely to increase it is likely to be delayed. This is because experience on the ground tells us that even if every adult became employed overnight there would still be a lag because the majority of leasing offices require a work history covering at least the previous six months. Moreover, this is the bare minimum and it is far more common for a work history of twelve months to be required. Indeed, in some cases the leasing companies’ approval policy dictates a two-year work history. In addition, as young adults build up a work history they are faced with the usual financial demands that come with living away from the family home – money for a deposit, fees, utility bills, furniture and so on. Unfortunately, for those who are currently unemployed, leaving their parents’ household is still unlikely to be an option for quite some time.

Of the missing households previously mentioned an additional 25 percent are employed. For this group multifamily developers will face different challenges in drawing them into the rental market. As a rule of thumb Millennials are more likely to have a poor or non-existent credit history, which can pose problems for individuals when they seek to enter into contracts that rely on a good track record of credit. The average credit score for a 20-29 year-old is 641, according to CreditKarma.com, which is lower than the American average of 675. Some experts have highlighted the decline in credit card usage as the basis for this trend – FICO reports indicate that at the end of 2012, 16 percent of Americans aged 18-29 did not use a credit card, compared to 8 percent in 2007. Without a credit card it can be difficult to build up a credit history or improve a poor one.

Multi-generational homes are becoming much more widespread, particularly among younger adults. According to data from the U.S. Census and reported by the Pew Center, the share of adults in the 25-34 age group who were living in multi-generational households increased more during 2007-2009 than any other group. There are positive financial benefits with these arrangements that can make them very attractive. When a multi-generational household contains several working adults it opens up options to save on regular bills by consolidating and dividing them up among more people. The cost of lighting a room does not increase when more people sit there in the evening but the cost of lighting it can be reduced because the bill is split more ways. Childcare costs are another large money saver. The most recent national averages for childcare costs, released by the Census Bureau last April, highlighted that the average cost of childcare rose by over 70 percent between 1985 and 2011 – from $84 to $143 per week. In multi-generational households the direct and indirect costs of child rearing are sometimes shared the rest of the family. Grandparents may offer free childcare, topped up with free meals, snacks, gifts and days out. In addition, there is a soft benefit of relatives being predisposed to closely monitor children’s health and entertainment activities, on more of a one-to-one basis and in tune with the family’s values, than perhaps the well-intentioned professionals at the community daycare. For parents, the high-quality, free childcare assistance that is on offer in a multi-generational home can make the family home a much more attractive proposition than a rental.

Previous generations may have felt constricted by this forced habitation. Notably however, there appears to be a generally positive feeling towards the arrangement from the young adults concerned. Data from the Pew Research Center shows that only 25 percent of those who returned to the nest felt that it had adversely affected their relationship with family members, with 72 percent saying that it had either improved the relationship or had made no difference. Sarah, a young tech professional in New York, recently moved back home with her parents. Like many 20-somethings, she had moved to the city after college to be closer to friends and her favorite activities. The reality failed to match the dream, however. Although she managed to secure a job it was located outside the city and involved a commute that left little time for the friends and pastimes she had been hoping to enjoy. She also discovered that her higher rental costs left her with far less disposable income to spend on leisure activities than she expected. The extra freedom she gained as an independent woman in the city was a plus but did not quite offset the minuses and she was left feeling that she was missing out on what her old lifestyle had offered her.

Sarah took the decision to move back home and when she did it significantly bettered her overall lifestyle. The two big improvements were the extra time she gained from a combination of less traveling and being able to share household responsibilities.

Sarah is part of a growing number of Millennials who feel that moving back in with their parents has been a good decision. Financially, it can make perfect sense for young adults to live at home. The poverty rate is much lower among young adults than their counterparts living on their own. It is not that Millennials just mooch off their parents. They generally make both financial and non-financial contributions to the running of multi-generational households. Research shows that almost all (96 percent) do chores and the majority (75 percent) contribute financially to household expenses like groceries or utility bills. However, only just over one-third (35 percent) pay rent, usually the biggest single expense for a person living on their own. With this saving Millennials are able to stay on a sound financial footing. In 2010, the poverty rate for adults aged 25 – 34 living in multi-generational households was 9.8 percent compared to 17.4 percent for other adults in the same age group.

The apartment industry has made huge efforts to entice prospective younger renters into the market, investing heavily in amenities and research to figure out what renters want. Thus we have seen luxury features becoming the norm, the evolution of the community experience in developments, and top-notch locations become prerequisites for developers, almost irrespective of the property price points. But in some ways this supply-side investment has been misguided and is a solution for a different problem. It does not address the issues concerning the middle ground of renters who face a sizeable deterrent from entering the rental market. This group, who make up the bulk of our missing households, have entered employment and earn too much to qualify for affordable housing but not enough to afford moving into one of the large stock of luxury rentals.

Prospective young renters like Sarah fall into this middle ground. In order for her a property to entice her from her parents’ home it must meet a checklist of ideal features including: a good central location that isn’t too congested; a hip area that is close to a good range of shops, restaurants and service providers; a unit with laundry facilities and a building with both a stunning exterior design and a smart interior layout. And of course it should offer competitively priced studio or one-bedroom options in the region of $1,000 or less per month.

Such a wish list is a tall order for any developer to satisfy, particularly at her desired price point. In the normal course of affairs the expectations of buyers would fall to levels that can be met by sellers. However, this is predicated on the assumption that prospective renters must find somewhere to live and that the rental market is the only provider of accommodation. The recent trend of returning to the nest has created a barrier to the balancing of supply and demand because it has freed prospective renters from the need to compromise. It has ensured that Sarah and other renters like her, whose checklists have mostly already been met while living at home, are prepared to wait until they find all the amenities they want at a mid-range price. With a situation where many markets are simply not offering this equilibrium of price and features, developers are being presented with a seemingly intractable problem.

According to the Pew Research Center, more than one in five adults (21.6 percent) aged between 25-34 are living with their parents or in similar multi-generational homes and as a result are not part of the rental market. This proportion has risen from 15.8 percent since 2000, an increase of 36.7 percent in ten years and is at its highest level since the 1950s. The majority of this age group has completed their college education. and is the biggest source of first-time renters, crucial for a growing rental market. Undoubtedly, the economy, student loan debt and higher college enrollment are all contributing factors. However, a key issue supporting these figures is that the majority of these interloping young adults are happy living at home. Of the 29 percent of adults aged 25-34 who moved back home during the recent downturn the overwhelming majority say that they are satisfied with the living arrangements (78 percent) as well as being positive about their future finances (77 percent). As mentioned they are justified in feeling like this, considering they are less likely to be living in poverty than their peers and are making substantial savings on rent. Like Sarah they are also not in the least concerned with the social embarrassment. On the contrary, for many Millennials living at home is the default option. The Pew Center’s research shows that while most 18-34 year-olds know someone who has had to move back into the family home because of the economy (63 percent) the figure rises to 70 percent for those who are living at home themselves (compared to 58 percent for adults living on their own). This suggests that social normalization may play a part in accepting the situation. As mentioned earlier, three-quarters of the young adults Kim Parker of the Pew Center interviewed, felt that living back home either helped their relationship with their parents or made no difference. Documenting this phenomenon in her 2012 report “The Boomerang Generation”, Parker said, “There can’t be a stigma attached to something that’s become almost a norm with a certain age group.”

 

Of course, not everything in the family garden is a rosy shade of red. Having adult children return home can lead to tension between boomerang kids and their parents. What about those boomerang children who actually like living with their parents? Often the parties have not set out a time frame for their departure. But how long is too long? In a recent Coldwell Banker survey, adults aged 18 through 34 were of the opinion that it is perfectly acceptable to live with their parents for up to five years after college. Dr. Robi Ludwig, a psychotherapist who worked on the survey, says this living arrangement can be healthy. “It depends on how it’s handled. If the young person regresses to a perma-child type mode, and if the parent goes into a perma-parent type mode, that’s damaging”, she says. If the individual has a financial goal while living at home, such as paying off student loan debt or saving to buy a house, it can be quite a positive experience. However, Dr. Ludwig warned, children who are living at home with their parents should not be given an easy ride. “Part of what makes this such a cushy scenario is that Millennials have a very close relationship with their parents; they like living with them, they look to them for advice,” Ludwig says. “It’s shocking to me to see how parents are enabling some of these young adults to live as permanent adolescents.” Where children are receiving an income from a job but have few financial obligations the issues with situation are especially emphazised. When this happens the outcome is a relatively high disposable income, which is often spent on socializing, nice cars and vacations. Susan Ende, who co-wrote the humorous “How to Raise Your Adult Children,” says boomerang kids are not embarrassed by how much their parents do for them, because they have a certain sense of entitlement. Besides, most of their friends are living back home. “They’re not freaky or unusual.”

 

Those in the rental market should be encouraged by a recovering economy and the knowledge that there is a large stock of renters potentially ready to move into empty apartments. However, optimism about this prospective customer base must be tempered by reality and the knowledge that there may well be a lag before demand really begins to take off and that this may not be of the scale previously witnessed.

 


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