While the U.S. homeownership rate has climbed slightly since reaching a 50-year low in 2016, it remains near a generational low at just 63.7%. Simply put, more people are choosing to rent than buy their homes in recent years than at any point since the 1960s.
RealtyMogul, an online real estate investment platform, recently commissioned Harris Poll to conduct a survey to shed some light on the reasons why more people are choosing to rent, and here are four major trends that help to explain the shift toward renting.
1. Americans find the homebuying process to be overwhelming
The survey of more than 2,000 U.S. adults found that 71% of Americans believe that the homebuying process is overwhelming.
Having gone through the process three times in my lifetime, it's certainly easy to see why they feel that way. From house-hunting to negotiating with sellers to the mortgage process, buying a house can be a time-consuming and stressful process. The mortgage process alone generally takes a month or more between the time when you have a signed contract and the date you take possession of the home.
In contrast, if you want to rent, it's relatively easy to go and look at a few possible homes, submit an application and security deposit, and move in within a matter of days -- not weeks or months. This can be an especially motivating factor, as Americans value convenience and simplicity more than ever, and the homebuying process is not particularly convenient or simple.
2. It's tough to come up with a down payment
Seventy percent of Americans surveyed believe that people these days will need to rent well into their 30s to be able to save enough money to buy a home.
To be fair, many people believe (incorrectly) that you need 20% down to buy a home. A 20% down payment is indeed the industry standard and can allow you to avoid mortgage insurance, but it's certainly possible to buy a home with much less upfront. If you have good credit, you can obtain a conventional mortgage with as little as 3% down, and even borrowers with so-so credit can get an FHA mortgage with a down payment of 3.5%. In fact, the average first-time buyer puts down just 6%.
Even so, this still requires a substantial amount of savings. The median sales price for an existing home in the U.S. is just over $258,000, and a 3% down payment translates to $7,740, an amount that many younger buyers simply don't have sitting around. In addition, closing costs generally add another 2%-5% of the sale price, and lenders typically want to see at least a few months' worth of mortgage payments in reserve. In a nutshell, even with a 3% down payment, the average homebuyer could need over $15,000 in cash before being able to buy.
3. Millennials value experiences over ownership
Americans are increasingly valuing experience over ownership, and this is particularly evident in the younger millennial generation -- the 18-to-35 age group. While previous generations have valued ownership more, millennials seem to be willing to sacrifice homeownership if it means they can afford to spend more money on experiences.
For example, nearly half of millennials surveyed told RealtyMogul that they would rather save their money to spend on traveling, rather than put it toward buying a home. In contrast, just 26% of Americans 45 and older feel the same way.
While there are more first-time homebuyers entering the market today than in the years immediately following the Great Recession, the portion of sales that come from first-timers is 37%, significantly less than the 46% peak in 1996, according to Genworth.
4. Americans change jobs more often than in previous generations
Finally, it seems that Americans value flexibility in their lives more than in previous years. More Americans want the flexibility to change jobs every few years, and the freedom to easily move to a new place if they so desire.
Thirty-five percent of Americans say that they would prefer renting a home over ownership to maintain a flexible lifestyle. Since the average person changes jobs about 12 times during his or her career, according to data from the Bureau of Labor Statistics, this certainly makes sense. It's not very practical to buy and sell homes a dozen times, but it's easy to rent 12 different homes over the course of a 35-year career.
Should you buy or rent?
To be perfectly clear, although more Americans are choosing to rent than have done so in recent decades, it's important to point out that more than 60% of homes are still owner-occupied. We're not exactly becoming a "nation of renters" as many people would have you believe.
There are perfectly valid reasons for owning a home, and there are some good reasons to rent, some of which we've discussed here. The bottom line is that the best option for you depends on a number of factors, so it's important to weigh the pros and cons of each option before choosing whether you want to be a renter or a homeowner.