College graduates in 2011 will leave school with record levels of debt, raising questions about the future of the housing market’s traditional supply of first time home buyers. Smart real estate agents will be prepared to help them anyway.
Solving the housing industry’s problems won’t be done by simply absorbing excess inventory or arresting price declines (re-inflating prices is even more absurd). It’s also fairly clear that lowering interest rates is having little or no effect on creating demand during the recession. But beyond the supply and demand challenges, new emerging trends in credit and debt, especially amongst younger generations, are possibly positioning the next generation of first time home buyers out of the market.
Consider the following challenges that consumers of “first time buyer” age face these days:
- Unemployment for 16-24 year olds stands between 18 and 20%
- College graduates under 25 face 9% unemployment; double what their 25-and-older rivals face
- Consumer prices (gas and food) rose to a 2 and a half year high of 3.2% inflation in April 2011
And now, the real whammy:
- The college class of 2011 will graduate with an average per-student debt of $22,900
The Wall Street Journal
summed it up this week, noting that the debt figure was up 8% in the last year
alone. More importantly, the overall college debt load is up 47% over a decade ago
. All of which works against the next generation of first time home buyers.
A decade ago, as housing prices started their meteoric rise, so did anything that housing equity could finance
. One of the Baby Boomers’ prime investments of home equity was college tuitions. And colleges knew it. That’s how we ended up with $40,000 a year tuitions to teach math and Shakespeare. But while housing market crashed, taking trillions in equity with it, college prices have barely dipped. According to SeekingAlpha.org
Between 1987 and 2009 US college tuition and fees increased by a staggering 326% (6.8% annually), while medical costs went up by “only” 186% (4.9% annually) and house prices by 135% (4.0% annually).
This spells serious trouble for the real estate industry. Rising graduate debt it jeopardizes a classic household migration pattern. Highly indebted consumers will find it even harder to borrow under increasing credit-standards. The outcome? It’s going to be a rental agreement for many graduates for much longer than it was for their parents. As the Journal put it, “The Collegiate Employment Research Institute estimates that the average salary for holders of new bachelor degrees will be $36,866 this year, down from $46,500 in 2009.” Even wage inflation isn’t going to close the gap any time soon.
Remember, credit is something you have, not something you get. First time borrowers will find it harder to borrow if they are young, their earning potential is flat or falling year-over-year, and they already have $23k in debt.
Are real estate agents prepared for this? We hope so. But too much chanting of “it’s a good time to buy” can sometimes prevent consideration of other solutions for consumers. And one long-neglected sector of the real estate market – rental services – might also open up new income opportunities. If you’re willing to deviate from the path. So how can real estate agents create opportunities from this financial mess? Easy:
- Agents who have heretofore pooh-poohed the idea of working with renters should try it, starting by going back to class and getting up-to-speed on rental market operations.
- Online marketing departments need to stop positioning rental services behind the curtains, and position it as front-and-center as search tools for purchases and open houses.
- Multi-family property specialists should be building up their sphere of influence (and their inventory) especially using social networks where younger renters can hear their message.
- Brokers and trade associations should consider ways to welcome renters, rather than always attempting to convert them into buyers. Some positive messaging is needed on what, for some, will be the only realistic housing option for a while.
- Builders should rethink their land-use and urban renovation options: Even if first time buyers qualify for a mortgage, it’s going to be on a much smaller property than recent McMansion decades. We might even see a new demand for multi-family units where rental income can help some younger buyers qualify for mortgages.
It’s long been a quirk of the residential housing sales
industry to frown on rentals. Too few brokerages seriously engage them as a revenue stream or future-buyer incubation division. Fewer agents see rentals as just another part of the sales
game, and have resisted diversifying their services and clients to include the rental sector. It’s almost no joke that some rental agents have to sit in Harry Potter’s broom-closet in their office.
Yet an Inman News article recently noted that a new Harris Interactive poll shows 40% of renters now saying they would never buy a home. Maybe that’s an opportunity knocking, not a storm cloud brewing?
Plenty of people will buy homes every year; some years more, some less. In the meantime, plenty will also rent. For too long, too many agents have discounted the rental market, while economics and consumer sentiment have been positioning it as a performing sector. In fact, the multifamily segment is one of the few performing spots in the housing market today. It’s unfortunate most agents consider themselves “residential sales only.” Certainly they cannot like working for weeks and weeks on short-pay short-sales and foreclosures. Renters, on the other hand, have definite – and shorter – time frames, either at the end of their lease or personal motivation to move out of the home after college. Merely mixing a few rental deals into your business plan could create a new source of cash flow.
Stricter credit requirements, high unemployment and the largest graduating debt-load in history could keep significant numbers of first-time home buyers out of the purchase market longer than in the past. Smart agents should consider other ways to engage the 80 million-plus Generation Y consumers in America. Why not help them take the first same steps many of them did on their journey toward home ownership. It’s likely to be the first step – and only revenue – they’ll be taking with many younger consumers in the housing market for quite some time to come.