Real estate investors should look to cities with an upsurge in millennials for new investing opportunities.
By Joel Cone Dec. 1, 2014 | 9:35 a.m. EST + More
As with any type of investment vehicle, anyone who wants to succeed in the realm of real estate investing needs to be a studious observer of market trends. Tracking everything from unemployment, job creation, population migration and economic stability, to housing inventory, home prices and rental yields in any particular region is essential.
Just like anyone else with goods and services to sell, the most successful investors are ones who own the supply when the demand comes calling. However, after the Great Recession hit, the next great wave of first-time homebuyers, the millennials, did not come calling. Instead, they were either attending college, or trying to start their careers fresh out of college.
In a report released October 2014, entitled, “15 Economic Facts About Millennials,” released by the White House, the President’s Council of Economic Advisers or CEA, noted that the millennial generation, which accounted for one-third of the U.S. population in 2013, will shape the nation’s economy “for decades to come.”
It should come as no surprise then, that with the baby boomer generation heading toward retirement years, and possibly downsizing or moving into retirement or assisted living communities, it would behoove real estate investors to follow where the next generation of homebuyers and renters is migrating to live, work and play.
A realtor study highlighted millennial migration patterns. This July, the National Association of Realtors, or NAR, released a report entitled, “Best Purchase Markets for Millennial Homebuyers,” which took into account a lot of variables that can affect real estate investors when making a decision on where to buy investment property.
“The premise of the study is that we have had this very low homebuying participation among young people. Many factors held back the millennial generation from home buying,” says NAR’s chief economist, Lawrence Yun.
According to the NAR report, homebuying among young adults under age 35 peaked in 2005, at 43 percent, before declining to 36 percent in the first quarter of 2014.
“Limited job prospects, student debt and flat wage growth have combined with tight credit conditions, and low inventory to price millennials out of some of the top cities, such as New York and San Francisco,” Yun said. “However, NAR research finds that there are other metro areas Millennials are moving to where job growth is strong, and homeownership is more attainable. These markets are well-positioned to soon experience a rise in first-time buyers as the economy improves.”
In conducting the study, NAR looked at a number of factors, such as the local employment situation, the inventory of homes, the migration patterns of millennials (where they are moving to) and the affordability of homes in those areas.
Out of the top 100 metropolitan areas analyzed by NAR, 10 markets stood out as projected to gain or to witness an increase in millennial homebuying in the upcoming year. Those metropolitan areas are:
Des Moines, Iowa
Grand Rapids, Michigan
Salt Lake City, Utah
Other metropolitan areas, which show strong potential for attracting Millennials include:
Raleigh, North Carolina
Looking at recent trends, Yun anticipates 2014 will be the low point in homebuying activity, with a pickup expected in 2015, although not back to normal levels.
“One underlying assumption going into 2015 is that the underwriting standards will be less strict, due to policy changes. The director of Fannie and Freddie is saying that 3 percent down is sufficient for people who are staying well within their budget, not stretching to buy a home,” Yun explains.
The investor’s perspective. Similar to the realtors, the most important metric for real estate investors when it comes to determining where to own property – is where the millennials are moving to, says Daren Blomquist, vice president of RealtyTrac.
“If they are moving to that market, then you can make money off millennials by renting to them initially, and then flipping to them as they decide to become homebuyers,” says Blomquist.
However, in conducting its “Q2 Residential Property Rental Report,” RealtyTrac examined down to the county level, rather than the metropolitan areas, like the NAR report. Still, when considering the factors that go into determining the best places for investors to buy rental property, many of the same factors were considered, such as migration patterns and employment rates, although the RealtyTrac report factored in the level of rental yield available in a particular market as well.
In all, 370 counties were examined nationwide, accounting for 60 percent of the U.S. population. To make the top 50, the county had to have at least 24 percent of total population in the millennial age range, and at least a 10 percent increase in the number of millennials between 2007 and 2013.
Employment rates were added into the mix, along with median home prices, and had to have an annual average gross rent of 9 percent or higher. The survey found investors buying residential property in the second quarter of 2014 were garnering an average annual return of 9.97 percent, down from a 10.60 percent return a year earlier.
As a result, the report named the following counties as the best markets to buy rental property, as of the second quarter of the year:
Anderson County, South Carolina
Woodbury County, Iowa
Pickens County, South Carolina
Alachua County, Florida
Allegheny County, Pennsylvania
Spotsylvania County, Virginia
Lexington County, South Carolina
Franklin County, Ohio
Dorchester County, South Carolina
Douglas County, Nebraska
Frederick County, Maryland
Rutherford County, Tennessee
Anoka County, Minnesota
Benton County, Arkansas
Polk County, Iowa
Based on gross rental yields, the RealtyTrac report also named the top five markets for renting to Millennials including:
Baltimore County, Maryland
Philadelphia County, Pennsylvania
Duval County, Florida
Cumberland County, North Carolina
Newport News City, Virginia
“We’re definitely in a recovery, but not a recovery that looks like previous recoveries. Not built much on the back of first-time homebuyers and move-up buyers. Still on the backs of investors, although the percentage of cash buyers is going down,” Blomquist says.
The case for an investor-driven recovery is based on a new metric RealtyTrac has been studying, which calculates the percentage of non-owner occupants. Based on data collected by RealtyTrac, the percentage of non-owner occupants is 30 percent of sales so far in 2014, the highest it’s been since the firm began tracking the data in 2001.
“That tells me that the recovery is still investor-driven, although investors are starting to slow down,” he says.
If there is a downside, it is that next year interest rates are expected to rise by 1 percent to 5 percent, Yun says. Although higher interest rates are always a deterrent to buying, he does not feel even a one percent rise will cause potential homebuyers to panic.
Joel Cone is a southern California-based freelance business writer who specializes in the fields of real estate, economics and law. His articles have appeared both in print and online for many publications including California Real Estate, OC Metro, GlobeSt.com and The Los Angeles Daily Journal. He is also a contributor to Auction.com.
Corrected on Dec. 2, 2014: A previous version of this story misstated two county names and locations.