First-time homebuyers are MIA -- renting

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/economy/housing/first-time-home-buyers-are-mia-landlords-are-the-winners-4c60cdb2?mod=lead_feature_below_a_pos1

First-Time Home Buyers Are MIA. Landlords Are the Winners.

America’s renter population has hit a record because fewer people can afford to get on the housing ladder

By Carol Ryan, The Wall Street Journal, July 7, 2025

…
Since mortgage rates began to rise in 2022, home builders have been a much better investment than apartment REITs. That is likely to now flip.

Vacancy rates are falling again in the rental market after more than a year of oversupply, which should help landlords push up rents. This should benefit stocks such as Equity Residential and AvalonBay Communities. Meanwhile, building stocks are losing some of the advantages they have enjoyed…

Based on sales through May, the U.S. is on track to sell 4.03 million homes in 2025, fewer than last year’s tally, which was the lowest since 1995.

The sharpest slowdown is happening among properties that cost less than $500,000, NAR data shows. That is the price range that usually attracts first-time buyers…

The flip side of sluggish demand from first-time home buyers is a rapidly swelling population of tenants. In a bullish sign for landlords, the number of renter households in the U.S. has reached a record 46 million. …

At today’s prices, buyers would need to earn $127,000 to afford the monthly mortgage repayments on a median-priced home, up from $79,000 in 2021, according to Harvard’s Joint Center for Housing Studies. Only 6 million of the country’s 46 million renters clear this hurdle. … [end quote]

The charts tell the story.

Student loan delinquencies are now being reported (after the Covid hiatus ended), dropping credit scores and disqualifying borrowers.

At some point the cycle may turn – mortgage rates and home prices may fall – but that would take a recession.

Wendy

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It doesn’t look good for first time home buyers now or in the future, unless we do something about extreme income inequality.

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Gen-Z has learned the magic of “rent vs. buy” at a young age. That portends well for their financial future.

They have more of their money in the stock market, and less of their money tied up in a poorly appreciating home.

intercst

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What I got from the article is they were born into difficult economic times and are fearfully saving up to 20% of income to buy a home.

The only magic I can see is if they’re ever able to afford a home.

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No. Eventually there will be another real estate crash and Gen Z will be able to buy homes at 30% of current valuation.in some areas.

Climate charge is going to create a lot of fire sale opportunities.

Also,. don’t forget that the stock market over the past 200 years has averaged about a 10% return – and you can get that 10% average return no matter where you live in America by purchasing a low-fee index fund.

Meanwhile, US residential real estate has averaged a 4% return with about half the homes in the country appreciating at less than 4%. Somebody owns all these homes that are appreciating at less then 4%

The longer you delay home ownership and keep your money invested in assets with a higher rate of appreciation, the more likely it is that you’ll be able to afford to rent a castle, if you think you need one.

intercst

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But whatever they may be, why would a Gen Zer want to buy a home in said location?

DB2

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Please tell me how and when that will come about. I know some people who would like to buy some day.

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Climate change is pretty much a global phenomenon. There are few “safe havens”.

intercst

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Yes, but homes are almost always leveraged. Most home buyers put about 15% down and then capture the appreciation of 100% of the value.

Let’s say you put 15% down on a $500,000 home ($75,000). At the end of 10 years, at 4%/year, your home would be worth $740,122. A gain of $240,122, or 320%, on that $75k down payment. A CAGR of 12.3%, which compares very favorably with stocks.

There are assumptions baked in there, like rent vs. buy costs, etc. But is isn’t crazy to conclude home ownership is a good deal in many cases.

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They are. But leverage works both directions, increasing profits and losses.

Ask Florida condo owners how leverage is working for them.

Leverage is only a good idea if you’re “judgement proof” on a loss (i.e., have little in the way of assets outside of the value of your home.)

intercst

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There are some baked in assumptions in my scenario, but in the Surfside condo collapse example, individual unit owners were not necessarily made whole, but they also didn’t lose anything beyond the limits of their insurance, which may or may not have been the value of their condo. But the only money they put at risk was their down payments and contributions to principle.

If you had paid cash for the condo, you also would have lost any value not covered insurance. But you put the entire price of the condo at risk.

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I’m talking about making good on the mortgage debt in a loss. Many people are under the misconception that private mortgage insurance protects the homeowner in a loss. That’s not true. The insurance company has subrogation rights, and can come after you to recover the claims made by the mortgage holder if they think you have enough assets to make the lawyer’s fees worthwhile.

intercst

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Sort of generic, maybe, but our GD & Husband, no kids, in their 30s, took an offer of free rent at her bio-Dads unused rental for a year, while they saved up to buy.. they bought near Pittsburg, but erred in not having an inspection, were in a rush to own, and it happened, but then it got worse, plumbing, electrical, foundation, wood eating bugs, so spent the first year having it fixed as they had no skills, abilities, and those of us that did, were still here in CA/NV… And they bought a cute Rottweiler puppy… Both turned out to be big errors…

They wanted to come back to CA, however current markets, rent is $2500+/m, IF they could find a willing landlord… Still have that mortgage in PA, can only rent that place for $300/m, so it is actually an impossibility, for now, for tham…

Sadly, like with the home purchase, they made some assumptions without talking ahead of time with us or the other grandparent… So there they are, unhappy with us, their location, messy… If the dog was not in the picture, all 120 pounds of her, between us and the other grandparents, we could likely help them out with a starter place, but recently it’s all gone silent…

Somehow when we started out, from zero, we managed to get into rentals, eventually taking over a CalVet loan, paying it off, moving on, raising a couple kids, at wages, salaries that seem really low today…

Tough times for the younger generations…This is the first of our 5 grandkids to buy a place, too bad it didn’t work out very well…

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I’m talking about the same thing. In either scenario (loan or pay cash) you might not be made whole by insurance.

That said mortgage companies require insurance to cover the full replacement value of the property, not just the value of the loan. In a practical sense the likelihood of the average homeowner the likelihood of being involved in a subrogation claim related to their mortgage is very low. If it does happen, you don’t save money by paying cash (assuming equal insurance in both cases of course).

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Someone else may have caught this already, but you’ve skipped the interest expense on the loan. That would be along the lines of $160K or so over the 10 years, reducing the gain to $80K.

—Peter

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Can you run the numbers because I’m not convinced this is true for comparisons between comparable homes?

Here’s the way I see it.
Consider a new home costing $500,000. The traditional rule of thumb is the monthly rent should be at least 1% of the home value, in this case $5K/month. In comparison, monthly payment for a $400K mortgage at 7% would be about $3K. Renters don’t have to pay for home repairs and some other expenses so for simplicity sake let’s assume the month cost for renters and home buyers in this scenario to be the same.

The difference then is the $100K downpayment. The renter puts that into an index fund growing 10% annually and in 15 years will have about $420K. The homeowner after completing the 15 year mortgage will have paid about $250K in interest (let’s ignore the tax deduction), but will now own a house worth (at 4% annual appreciation) about $900K. That minus the interest cost is $650,000. Subtract another $50K for 15 years of $3000/year property tax and owner gets a gain of $600,000.

Looks like a significant advantage to the home owner to me.

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The NY Times has a good rent vs buy calculator.

free link:

The problem today is that there are few places in the country where the 1% rule works.

Where I live in WA State, town homes currently have a monthly rent of about 0.6%-0.7% of sales price. In San Diego it’s 0.4% to 0.5%

A $500,000 town home in my neighborhood would rent for $3,000 to $3,500/month.

intercst

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But this is literally the point of what @intercst is saying! If that $500,000 house rents for $5,000 then you can go either way - rent or buy and it’s more or less equal. But when things go out of whack, for example the aforementioned $6M house in Beverly Hills that rents for $6k (according to zillow), then it is clearly worth renting rather than buying. And when it goes out of whack in the other direction, like after the GFC when condos that rent for $1200 were selling for $75k, it is clearly worth buying rather than renting.

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I have watched this discussion with interest. While renting may have advantages in some situations (e.g. if a person expects to move in a short time), renting and buying a home are not equivalent.

@intercst is focused entirely on money. He claims that it’s better to rent than buy because the renter can invest in an S&P 500 fund which will appreciate in value faster than a home. Somehow @intercst seems to think that money spent on rent can also be invested at the same time. Sorry, you can’t have your cake and eat it, too.

He is missing several important points.

  1. Money spent on rent is gone forever. Money spent on a mortgage builds equity in a house. It is well-known that generational wealth is built gradually by ownership.

  2. Many renters don’t have money to invest in an S&P500 index fund because they are spending it on rent. According to the Washington State Department of Commerce, Over 50% of all Washingtonians experienced rent burden (paying at least 30% of income on rent) in 2023. According to the Washington Center for Real Estate Research, Nearly half of all renter households in Washington state face high-cost burdens, paying more than 30% of income on housing costs, with one-quarter paying more than 50% of income on housing costs. This number continues to grow. People who are paying that much for rent have little to spend on necessities, let alone investment. So the concept that a person can pay rent AND invest significant amounts in the S&P 500 index fund isn’t realistic in most cases.

  3. Renters are at the mercy of a landlord. When I got the mortgage for my first house (in 1983) I was guaranteed that my monthly payment would be $600 a month for the next 30 years regardless of inflation or the whims of a landlord. I didn’t have to worry about an annual lease that could change. Not to mention that I controlled the heat in the house myself. (My last landlord kept the heat too low and I was always cold which was the incentive for me to buy instead of rent.)

Of course, real estate is always a matter of location, location, location. And supply and demand. The rental market and housing (purchase) market are separate though they overlap. There are some cases where the price differential becomes so extreme that renting may make more sense. There are calculators that compare them.

But it’s important to realize that renting and ownership are qualitatively different.

I never count my home’s value when I calculate my assets. I think of it as “one house unit.” If its value goes up all houses will go up together. If its value declines all houses will decline together. I will always need a roof over my head even if were to sell the house and use the proceeds to pay rent.

The key issue for me is not money (as it is for @intercst ) but stability and security. To that end, I paid off the mortgage so that if I lost my job I wouldn’t also lose my house. DH and I have not paid mortgage or rent since 1990.

Wendy

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It’s silly to keep bringing up examples like this which represent maybe 0.0002% of the real world. Like Wendy, my first mortgage was roughly the same as a rent would have been, except the mortgage never went up. Toward the end of my 30 year ownership I was charging $2500/mo, not the $600/mo of the original mortgage. Meanwhile I sold the $65,000 condo [$10,000 downpayment in the rest leveraged] for a nice $1M.

So: $10G to $1M, rental profit along the way, depreciarion as a bonus. Sure trntal always wins, ha!

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