Why Millennials Are Interested In Real Estate Investing
Americans have stashed the majority of their investment dollars in the stock market over the years. But there may be a new trend on the horizon. In 2007, nearly two-thirds of Americans were investing in the stock market; last year, just over half did. A new generation of investors may be turning to real estate instead.
RealtyShares recently teamed up with Harris Interactive to put out the Real Estate Investing Report, surveying Americans on their investment preferences. And according to the survey results, 55 percent of millennials are interested in investing in real estate, the highest percentage of all demographics questioned. Research from Fannie Mae supports these findings, reporting that 85 percent of millennials think real estate is a good investment. With such a strong preference for real estate, it is important to understand why millennials are interested and how they may invest in the future.
Why is it important? Well, last year, millennials became the largest generation of Americans. According to a recent Pew report, there are 75.4 million millennials compared with 74.9 million baby boomers. As the largest age group in America, millennials will have the greatest ability to shift the market as their net worth builds, rendering it key to take note of millennials’ views on real estate and investment opportunities overall.
Millennials are skeptical of the stock market
Survey respondents were asked to choose between stocks, real estate, commodities, bonds, and cash equivalents such as oil, gold and cotton as the best-performing investment since 2000. Overall, 40 percent reported uncertainty around which asset class performed best, and 25 percent believed the stock market was the best investment.
In reality, real estate outperformed the stock market during that time frame. Millennials got it right: over the 16-year period from 2000 to 2016, the S&P 500 yielded a 5.43 percent annual total return compared to 10.71 percent in real estate. And while the S&P has had a slight advantage more recently, both markets have recovered well since the Great Recession, with the S&P and real estate at 12.65 and 11.37 percent, respectively (range from Dec. 31, 2010 – Dec 30, 2016).
In the RealtyShares survey results, 20 percent of millennials indicated they believe real estate has performed the best since 2000. In fact, millennials were the age group with the largest percentage with that belief. The next highest group to believe real estate outperformed the stock market since 2000 is comprised primarily of Generation X (ages 35–44), 16 percent of whom chose real estate as the top performer.
Why are millennials the generation most likely to value real estate over the stock market? Many millennials graduated from college and entered the job market during the Great Recession. This major economic downturn made it difficult for millennials to find jobs. Simultaneously, they watched the stock market undergo the worst crash since the Great Depression. Although the housing bubble burst contributed to the stocks’ crashing, the stocks may have lingered in people’s minds longer than the housing market did.
Millennials have watched real estate bounce back
In 2007 and 2008, the subprime mortgage crisis caused a panic to unfold in real estate. Across the country, many Americans took home loans they couldn’t afford, which artificially increased property prices. The resulting bubble led to a major market adjustment — housing prices fell 18 percent in 2008. CNN Money reported that at the end of 2008, home prices had fallen 27 months in a row.
It has taken eight years for the real estate market to recover, but in some markets, real estate is red-hot. Housing prices in popular millennial destinations like Portland, Denver and Austin have been steeply rising. And while millennials may have waited a bit longer than prior generations to marry and buy a home, Zillow reports that half of first-time home buyers in the United States are under 36 (compared with the median age of around 33 from 1995–2009), and first-time buyers make up 47 percent of all property sales.
Morgan Stanley believes we are still in the midst of a real estate recovery, but there is still more good news ahead in the coming years. According to a study by the American Modern Insurance Group, 86 percent of millennial renters plan on owning a home someday. This equates to roughly 50 million future homebuyers entering the future housing market.
Millennials see advantages in owning a tangible asset
Millennials, ever-vigilant on the internet, are paying heed to online financial experts. One of these experts especially popular among millennials is personal finance blogger Financial Samurai, who recently shared his preference for investing in real estate over the stock market.
Also, stocks, as an intangible asset, are difficult for many to quantify. However, with real estate you can physically see and occupy the investment. This makes for an intriguing investment choice for the more visually minded/image-oriented millennial generation.
While the large down payment needed to invest in real estate is the biggest reason millennials aren’t buying real estate, thanks to online real estate investing platforms, millennials can now invest in real estate without saving tens of thousands of dollars for a down payment.
Real estate may flourish with millennials leading the charge
While older generations may be more interested in downsizing, millennials are having children and growing in their careers. Buying a home is the next logical step. With positive returns potentially on the horizon, millennials are on the right track. The data says real estate has the capacity to be the best investment, and millennials are on board.