On an almost-daily basis, we hear the question: When will the millennial / first-time buyer emerge? While predicting the behavior of a cohort still recovering from high levels of unemployment and a record amount of student loan debt can be tricky, the response of some of the largest apartment REIT operators is an unhesitating no time soon.
When your apartment lease expires, you have two choices: to renew or move out. Each quarter we track the percentage of residents who move out of an apartment to purchase a home. (Other reasons for moving out can include a job change, eviction, or rent rising too high). By studying publicly traded apartment REITs who manage a combined 520,000 units, we have learned the following:
- During the housing boom of the early to mid-2000s, roughly 1 in 5 renters leaving their apartment opted to purchase a home. In fact, the national homeownership rate peaked in 2004—at the same time that the percentage of those moving out to purchase a home was peaking.
- Since 2008, the percentage of renters moving out to purchase a home has remained below its historical average of 17%, while the homeownership rate has continued to decline.
- As of the fourth quarter of 2014, just 14.7% of all tenants moving out purchased a home. The homeownership rate declined to 64%, the lowest since the mid-90s.
The public apartment REITs we track primarily operate communities that target more financially stable millennial tenants (i.e., the most qualified to purchase a home). During the fourth quarter of 2014, the weighted average rental rate of these REITS was $1,652, roughly 31% higher than the national average asking rent. One would think that enduring years of sizeable annual rent increases would push tenants toward owning a home. However, even with an improving economy and a more stable employment outlook, this trend has simply not occurred. While newly revised FHA loan requirements have the potential to pull more first-time buyers out of apartments, the data does not indicate a significant uptick in FHA buyers.
We study the apartment space to determine what trends will impact the for-sale housing market. We offer a dedicated research report covering the apartment industry that guides developers, lenders, landlords, and investors as they navigate the market.