Much as was the case prior to the Financial Meltdown in 2008, housing ? both purchases and rentals ? have made a stunning comeback. At least prices have. Late last year it was reported that house price levels finally eclipsed their 2006 price peak and are climbing higher.
The recovery is of course uneven. In some markets, house prices are well above their pre-recession peaks. In others, they still haven?t recovered fully. And in still other markets, they remain mired at or near recessionary levels.
But housing has become a problem at all levels of society. In areas where job growth has been strong, house prices have outstripped salary growth. And in areas where housing prices are softer, living wage jobs are scarce. In relative terms, housing has becoming more expensive no matter where you live.
Enter shared housing for Millennials. I?m sensing the start of a new trend.
Shared Housing for Millennials is on the Rise ? 21st Century Boarding Houses
In response to rapidly rising housing costs, there?s been a trend toward cohousing. An article last week on TechCrunch, reported that Shared housing startups are taking off, as upstart companies take over apartment buildings, and convert them into shared living situations. Three or four tenants may share a single apartment, in a building designed specifically for shared housing.
I found this particularly interesting because a couple of months ago I addressed this issue in regard to retirees, in Why Cohousing May be the High Cost Retirement Housing Alternative. Rising housing costs are threatening retirees. But according to the TechCrunch article, they?re also constraining highly paid younger workers.
The activity reported by TechCrunch is happening primarily in and around a small number of high cost cities, like New York, San Francisco, Los Angeles and Seattle. In those markets, housing has become too high even for tech workers earning six figures. This may seem like an isolated situation, but all major trends start in small corners of society.
Shared housing for Millennials is becoming increasingly popular in prime, high-cost population centers. There?s an excellent chance it will spread to suburban areas, and eventually across the country, even to lower cost cities.
It?s the Pareto principle in action. Most activity involving change is initiated by the top 20%. But Charles Hugh Smith has refined the concept even further. He maintains that change is primarily initiated by the top 20% of the top 20%. In other words, 4% of the population ? 20% of the top 20% ? drives the top 20% of the population, who drive the rest of the remaining population.
This is how relatively small numbers of people can initiate huge changes society wide.
Housing Prices and the Real Economy are Unbalanced
We often hear that Wall Street has separated from Main Street. This is true with housing as well, and for most of the same reasons. The Federal Reserve ? whose apparent job it is to manage the economy ? reasons that rising stocks and housing prices signal a strong economy. For that reason, they keep interest rates artificially low, and money creation excessive.
Contrary to popular belief and propaganda, rising house prices actually aren?t good for the majority of people, and we?re seeing evidence of it all over.
Consider the evidence:
House prices. According to the US Census Bureau, the median home value in the US in April, 1970, was $24,200. By April, 2018, it?s risen to $312,400. That?s a nearly 13-fold increase in 48 years.
Median household income. According to the US Census Bureau, the median household income in the US in 1970 was $9,430. It reached $59,055 early in 2018. That?s slightly higher than a sixfold increase in 48 years.
So we have a sixfold increase in the median household income since 1970, but a 13 fold increase in median house prices during the same timeframe. That means house prices have risen more than twice as much as household incomes since 1970.
Here?s a little bit more math: the average house value in 1970 was about 2.5 times the median household income. But in 2018, the average house value is six times greater than the median household income.
And here is yet another factoid to keep in mind ? in 1970, far fewer households required both husband and wife to work. Families could survive in a single income. Today?s median household income number is largely comprised of two full-time workers in the home.
Housing is Becoming Unaffordable at All Levels
These are national numbers, which show the housing imbalance isn?t just in the higher-priced coastal urban areas.
It?s often suggested that people who live in high cost areas relocate to places where housing is cheap. But the problem is that housing is cheap in those areas for a reason. In much of the rustbelt, manufacturing jobs that were once the mainstay of local employment have disappeared. Much hallowed high-tech positions haven?t taken their place. A $150,000 home may seem cheap to someone living in New York or San Francisco, but to someone living in a rustbelt city, earning $10 per hour, buying that home is the impossible dream.
What?s more, while we?ve been focusing primarily on fast rising median housing values, there are other factors that made housing prohibitively expensive. For example, costs for real estate taxes, property insurance and utilities have exploded in recent decades. A $150,000 home with a $4,000 annual property tax bill adds more than $330 to the monthly cost. And utility costs, which can run several hundred dollars per month, don?t even factor into the way mortgage lenders qualify buyers for loans.
The average homeowner?s household budget is stretched much more tightly than surface factors indicate. It?s a major reason why people often feel poorer, despite making more money than they have in the past.
The Rental Market Too
Basic rents are rising rapidly as well. Part of this has been driven by the decline in homeownership. The rate of homeownership fell to 63.6% of households early in 2017, down from an all-time high of 69.2% in 2006. That near 6% decline in the rate of homeownership translated to millions of new non-owning households. It?s put greater upward pressure on rents.
Apartment List.com has a list of median rents for one and two bedroom apartments in 100 US cities. Some of the numbers are at nightmarish levels. Two bedrooms in New York City, $2,470, Boston, $2,080, Los Angeles, $1,740, San Diego, $2,010, San Francisco, $3,060, Seattle, $1,650, Jersey City (NJ), $1,880. These are just the midpoints; it?s likely that any apartment you find remotely desirable will be above the median.
Although those are higher-priced areas, rents are up all over the country.
The US Census Bureau reported that the average monthly rent nationwide was $108 back in 1970. That comes to just $1,296 per year, which is less than 14% of the $9,430 median household income at the time.
The blog Rent Caf?.com lists the median US rent at $1,377 per month for April, 2018 (Census Bureau statistics on recent rent data are conspicuously absent). If that?s the case, the annual median rent in the US is $16,524. That?s nearly 28% of the $59,055 median household income.
Median rents doubled from 1970 to 2018, when compared to median household incomes for both years. This is consistent with what?s happened with house prices.
This is why the cost of living seems to be getting relentlessly higher. In real terms, it is. The take away is that housing for renting or owning now consumes twice as much income as it did in 1970.
The Housing Imbalance Will Likely Get Worse in the Next Recession
As bad as housing costs are right now, they promise to get even worse in the next recession. When recessions hit, people lose jobs and incomes fairly quickly. Bonuses, commissions and overtime are cut or eliminated. Small businesses decline and close-up shop.
But prices remain fixed, especially in the early going. Most industries are reluctant to even acknowledge declining conditions. It doesn?t fit neatly within the forced optimism of the business universe. For that reason, they?re slow to react to changing circumstances. When they do react, they overreact, such as by initiating severe and immediate layoffs. Cutting prices is only done as a last option, in a desperate attempt to save market share late in the game.
Real estate prices are especially ?sticky?. Whether it?s house prices or rents, sellers and landlords are very reluctant to cut prices, even in severe economic declines. Much of it has to do with the cost of acquisition. If you paid a high price for a property, you take on a big mortgage. Meanwhile you have high costs for property taxes, insurance and utilities. And in the case of a rental, you have those expenses even if you have vacant apartments.
Sellers and landlords initially react to economic declines by ignoring them. (It?s become standard procedure in the real estate industry to pretend declines don?t exist until after the fact.)
The net result is a financial conundrum, of high housing costs against the backdrop of declining incomes. Housing costs, which were largely unaffordable even during better times, morph into a full-blown housing crisis.
The next recession is sure to bring an even more peculiar situation. As the top 10% of households have become ever wealthier, they?ll continue to keep housing prices high in select markets. This will make the affordability problem even worse.
The Virtues of Shared Housing for Millennials – And Everyone Else Too
This is why I think shared housing will only grow in the future. Right now the preferred norm is a single-family house in the suburbs. But stop to consider that this is the most inefficient housing arrangement there is. It consumes an excessive amount of land, resources and income, as well as keeping personal capital tied up in dead equity. It also contributes mightily to massive traffic problems, since virtually everyone in suburbia commutes to work and everywhere else.
As normal that seems right now, an economic decline can force a change that?s already taking place at the fringes. Shared housing is most likely to affect younger people and retirees, for whom housing costs consume a much greater percentage of income. But as it becomes more normal among those groups, families and prime working age people may follow suit. After all, in most of the world, people live in much smaller housing spaces than we do in the US. It?s all about what you?re used to – or can get used to.
A Real Life Example of Someone Who Made a Virtue of Shared Housing
There was a very frugal young man I knew way back when. He was a curious mix of extravagant and cheap, if that seems even possible. To complicate the story, he was a construction worker earning a decent, but far from rich income.
He lived well, he dressed well, regularly ate in expensive restaurants, and was an active vacationer. Each summer he?d rent a house at the beach for several weeks (usually with others as his cheap side rose to the surface). In the winter he?d travel to someplace tropical, like Hawaii, Acapulco, or the Caribbean.
How did he do it on an ordinary income?
A big part of it was shared housing. For a solid 15 years, he?d lived in three bedroom apartments with a pair of roommates. If the rent was $300 (this was the 1970s and early 1980s), they split three ways ? $100 each. He also bought only used cars. He once told me ?When you buy new cars, you only buy what you can afford ? when you buy used cars, you can buy anything you want.
With this combination of keeping his basic living costs low, while living large, he managed to save an outsized amount of money. In the mid-1980s, he purchased a single-family house in a well-to-do community, and made a 20% down payment. And he still had plenty of money in savings.
Postscript: After buying his house he got married, had a family, and retired to the beach in his 50s, never having earned more than an ordinary income.
This man turned living cheap/living large into a virtue. It?s the kind of thing that actually can be done. People are more flexible than we give ourselves credit for, but it often takes a large dose of motivation to force such a change.
Final Thoughts on Shared Housing for Millennials
Given that we?re unlikely to see any top-down changes in the housing situation, we?re going to have to adjust. Shared housing is increasingly looking like one of those strategies. For what it’s worth, most sweeping cultural changes do come from the ground up.
We?re already seeing shared housing taking place at the fringes. Right now it?s becoming something of a corporate thing specifically targeting upper income Millennials. But it?s highly likely that less formal roommate arrangements are much more popular than anyone suspects.
My Millennial daughter recently introduced me to a new term, u-hauling. It?s where young people get into a relationship, and immediately get an apartment together. It looks clear this has more to do with economics than romance, but it?s the kind of thing people do when faced with limited options.
We may eventually see pairs of couples sharing an apartment or a house, or even two families sharing one home. The possibilities are endless, and so is human ingenuity.
This can be a highly beneficial arrangement for retirees as well. And from there it may spread to the general population, as the economic squeeze on the middle class continues to tighten. While it will probably be resisted (enthusiastically), it may turn out to be a winning strategy in an era when great change is being forced on the vast majority of people.