By Robert L. Cain
I live in a suburban town five miles north of Tucson with about 50,000 residents and three major employers. But that is not enough for what’s happening here and around the country. As I drive down the main highway that connects Oro Valley, where I live, with Tucson, I see at least four major apartment construction projects underway. Each of these projects looks like when finished it will house around 1,000 people. They are being labeled “luxury” to attract people accustomed to luxury or just wanting a taste of it. I gaze in wonder, though: where are those people are going to work?
They’re building them as fast as they can. Apartment building is about the only thing that is keeping housing construction going. In September 2014, reports the Commerce Department, housing starts rose 6.3 percent, most of which came from apartment starts. The Associated Press reported that “Apartment construction has surged 30.3 percent over the past 12 months,” albeit showing a great deal of month-to-month volatility.
On the other hand, single-family building permits have risen only 11 percent over the last year. All that is good news for rental owners.
Let’s combine that with another figure, though: student loan debt. “The class of 2014 graduated with an average student loan debt of nearly $34,000,” reported the Orange County Register Oct. 16, 2014. The Federal Reserve Bank reported in 2013 that student loan debt is the only debt that has grown since 2008 when consumer debt was at its highest.
The Register further reported, “student loan debt has escalated to the point that most under-30 grads cannot afford to take on a mortgage while also making their monthly college loan payments.” Too much debt, can’t buy a house.
Be that as it may, they don’t build huge apartment complexes unless they have done at least a small study showing that the complexes will turn a profit. After all, the fresh-out-of-the box college graduates won’t be able to buy a house for a decade or more, so they are going to rent.
The “Transunion Consumer Wallet Survey” for 2014 as reported in Inquisitr.com found that “mortgages have been steadily decreasing in the age group of 20-29 year olds during the years of 2005-2014. They drop from 63.2 percent down to 42.9 percent within that nine-year stretch.”
This is good news for rental owners because these folks have to live somewhere. After they get tired of living with mom and dad or when mom and dad get tired of them living at “home,’ they will find another place to live, mostly likely a rental.
They won’t all want to rent one of those apartments in the behemoth complexes. Many will want to rent single-family, duplexes, and in smaller multi-family communities.
There is a caveat, though, the same one mortgage lenders see, and why mortgage lenders won’t give them a loan. That’s why 20-somethings come to landlords. Many new grads are having trouble making the payments on their student loans. A report issued by the Consumer Financial Protection Bureau on Oct. 16, “concludes that many of these borrowers are being driven to default because no viable repayment options are available to them.” The US Department of Education on Oct. 7 reported that some 14 percent of student loans are in default. How they define default is further disturbing because government loans are not considered to be in default unless they are 270 to 360 days past due. Measured by the criteria that regular lenders use, 30 to 90 days past due being delinquent, those account for 17 percent of student loans. “Of all the government student loan payments, less than half (42%) are being remitted in accordance with the original terms of the loan (10 years, level-payment plan),” reports the office of Federal Student Aid (FSA).
This issue is not going to go away anytime soor, either. A study released in September written by Steven Davis of the University of Chicago and John Haltiwanger of the University of Maryland entitled “Labor Market Fluidity and Economic Performance,” found that the young people entering the workforce have a tough time because of older workers staying on the job for health insurance and the inability to retire, which results in a less fluid labor market than is ideal for full employment. That means people entering the workforce will have a more difficult time finding work and then getting a salary that will enable them to, say, buy a home and pay off student loans.
That means screening is even more vital than ever. Will these renters be able to pay the rent after they plunk down sometimes $1,000 a month for their student loans? What will happen when they default on their student loans and go into collection? Will they be able to find the kind of jobs that previous generations did at their ages? No, they won’t be able to buy homes, so they will be renting, and apparently for some time to come.
It’s a great time to be a landlord as long as we are careful about our applicants, and the apartment-building boom proves it.