What Does (and Should) the Future of Homeownership Look Like?

Is Homeownership Still a “Dream” Investment?

There is a generations-old ideal that buying a home is a great investment — and that doing so is the ultimate way to prove fiscal responsibility and “success.” But as millennials become adults and would-be homebuyers, they are met with deterrents on all sides. From a purely financial standpoint, does this American Dream, especially for those in major cities, even make sense? And how are innovative business models changing what that dream does — and should — look like in another 20 or 30 years?

Today, Americans between the ages of 25 and 34 are buying homes at a slower rate (about 8 percentage points) when compared with Gen Xers and Baby Boomers. The difference is even greater when it comes to those living in metropolitan areas. This shift is driven by a combination of preference and financial ability. Millennials are getting married later than their parents; they’re also facing more generational-specific obstacles such as the student loan debt crisis. Further, with more baby boomers looking to age in place, their share of homeownership in the US is holding steady, preventing the turnover seen with previous generations. In 2000, baby boomers made up 43.5 percent of all homeowners, and by 2019, this number has only dropped to 41 percent.

These dynamics, along with the rise of home prices, create a discussion within the tech and real estate industries around whether millennials should be buying homes, and if so, are better ways to help them do it.

It’s essential to keep in mind that today, there are now two completely different, and sometimes contradicting, ways to define “success,” in terms of real estate decisions. One is securing a stable place to live that makes sense and fits a lifestyle — otherwise known as the ‘American Dream’; the other is viewing real estate as an asset class and seeing property as a smart investment. But can these two ideas coexist and always hold true? And it also means understanding that sometimes, investing that down payment into the S&P could give you the same, or better, return.

So how did we get here? And what are the possible solutions that have popped up to help us figure out the right path and help us reach our goals?

Is There No Place Like (Your Own) Home?

There is still, clearly, an argument that renting is a waste of money — that when you do it, you are throwing your money away. Seeing it that way, buying a home is the most logical decision. But then there are facts to contend with.

For one, homes are significantly more expensive. Millennials buying their first home today will pay 39 percent more than their baby boomer parents might have in 1980, according to one study (adjusting for today’s value of money). We are more likely to live with our parents, or roommates, as we push off marriage longer. As incomes fail to keep up, saving up for a 20 percent down payment takes 14 years, on average, and in desirable cities, 27 years.

Some entrepreneurs have tried to help would-be home buyers clear what is often the biggest hurdle when it comes to buying a home — the down payment. Companies like Divvy Homes, Wayhome (UK-based and an Anthemis portfolio company) and ZeroDown help first-time home buyers ease the upfront burden of buying a home. They each split the cost of the down payment with customers so that they can make it. Customers are then essentially renting the part they don’t own from the platform, and, over time, they are able to increase those payments in order to fully buy their home. Even with solutions like these, millennials are still struggling to purchase a home on their own. According to a CNBC report, 30 percent of older and wealthier millennials receive assistance from their parents (compared with 15 percent of Baby Boomers).

While the companies mentioned above strive to solve the affordability issue when it comes to buying a home, they also operate under the assumption that homeownership is the right path for everyone. Many people underestimate the true cost of owning a home, ignoring the additional fees, taxes, maintenance, and insurance costs that are outside of mortgage payments — and they sometimes regret the decision. The S&P is actually seen as providing a higher return versus the real estate market for longer-term investors. However, over the long term, housing does provide a less risky yet still high return, when compared to stocks (a 6.1 percent and 8.5 percent return over the same 20-year period). To achieve this, however, home buyers have to be committed to long-term ownership — typically a minimum of 10 years — to really get the return that justifies the out of pocket expense.

As millennials rent for longer periods of time, other solutions have arisen to help them make more responsible housing decisions. Co-living — companies that extend college dorm-style living into adulthood — has gained traction, further underscoring the market’s inability to provide homes. Alternative housing platforms like WeLive, June Homes and Ollie aim to offer more flexible, convenient and affordable ways to rent in major cities. They cater to people looking for short-term or long-term housing without the additional burden (and cost) of furnishing. They also range in terms of price, offering private apartments or rooms in shared homes.

Nesterly and Silvernest are two companies that are looking to solve two problems at once, as empty nesters who are looking to age in place have higher expenses and rooms that they don’t use. Using these new platforms, this demographic can rent out spare bedrooms to people looking for more affordable housing.

These trends are primarily impacting first-time homebuyers. Many millennials are forgoing the starter home due to the time it takes them to save as well as a growing shortage of starter homes, as other types of property owners enter the market. Because of this, when millennials do eventually buy-in, the homes are typically larger and look very different from those of their parents.

A Different Kind of Dream

Know who is dreaming of starter homes in 2019? Investors, who, in 2018, purchased 1 in 5 homes in the bottom third of the price range, according to a study by CoreLogic. The hottest markets are places where home prices are low enough so that the buyers can still profit by renting them out: The same study found that close to half of the starter homes in Philadelphia were bought by investors, as well as 40 percent of those lower-priced homes in Detroit.

IBuyers such as Opendoor, Zillow Instant Offers, and Offerpad contribute to this problem as well. These platforms give sellers more immediate liquidity and the ability to avoid the onerous home-selling process. However, like real estate investors, they are typically able to provide cash offers at a faster pace — which means that they are able to provide a more attractive offer than the average homebuyer. While IBuyers will typically bid lower than other investors, they provide a convenient experience that makes it hard for consumers to compete.

This creates a very tough market for the average person who wants to own — as well as a more competitive renting market for those who have no choice. But the silver lining — particularly for people with competitive salaries who are renting in big cities — is that they could get more out of a down-payment by purchasing an out-of-town properties. This has created a domino effect: Millennials rent so they can live in cities where they can’t afford to purchase property, and instead purchase vacation homes or rental properties in more rural areas, pricing out the people who live there full-time.

We at Anthemis are very interested in the real estate space, both from an investment standpoint as well as a way to help identify solutions to the challenges outlined above. We are very excited about the alternative asset space; there is a lot of appeal in differentiated returns and improved access to opportunities that have been, until recently, reserved mainly for high net-worth individuals. We’ve made investments in companies such as Arthena and Rally Rd, which both look to improve access to some of these asset classes. As we see that most demographics have been locked out of real estate, one of the largest asset classes, we think there is even more potential to help more recreate and increase access to the “American Dream.”

If you are interested in this conversation or are a founder working in this space, I would love to hear your ideas. Please contact me at jillian@anthemis.com.