What Younger Renters Want and the Financial Constraints They See

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FM Commentary

What Younger Renters Want and the Financial Constraints They See

Sarah ShahdadMany younger renters have faced or will face a significant life decision: whether to continue renting or to buy a home. While housing tends to be the biggest expense in a given household, family and lifestyle considerations often play at least as big a role as financial considerations in determining housing preferences that ultimately will affect housing costs. Decisions about whether to own or to rent, where to live, or how big of a home to live in have significant effects both on our day-to-day lives and on our wallets. Finding the right balance strengthens the financial health of individual households and the stability of the housing market and overall economy. In the latest National Housing Survey Topic Analysis, Fannie Mae’s Economic & Strategic Research Group sought to better understand what housing choices younger renters prefer – and what financial constraints they see – in order to shed light on the challenge of fulfilling housing aspirations in a financially sustainable way.

Potential first-time homebuyers face credit standards that have risen since the housing crisis. Overall, the total number of renter households has been increasing since the housing crisis, as the number of owner households has decreased. Still, analysis of data from Fannie Mae's National Housing Survey shows that most younger renters prefer owning both for lifestyle and financial reasons.i

Views on homeownership or renting for younger renters from third quarter 2012 to third quarter 2013

However a large majority of them have remained pessimistic over the last few years about their ability to get a mortgage; in contrast, younger owners have grown more optimistic. ii Demographic differences between younger renters and younger owners may explain part of the gap in attitudes shown in the chart below. Younger owners are more likely to: fall in the higher end of the age range, earn more household income, and be employed full time, compared with younger renters. The widening of that same gap during the last few years suggests that confidence in one’s ability to get a mortgage is growing primarily among those who have already met financial requirements.

Views on ease or difficulty in obtaining a home mortgage from January 2010 to fourth quarter 2013

Younger renters consider down payment and credit score to be top obstacles to getting a mortgage, and the presence of student loans exacerbates down payment and existing debt concerns. Younger renters' pessimism about the difficulty of getting a mortgage increases as income and asset levels decrease. The majority of younger renters report having insufficient assets to cover a 5 percent down payment plus closing costs on a typical starter home.

Though they see a tough road to affording homeownership, younger renters still are very likely to say that it’s in their future plans. The vast majority still plan to own someday; about half plan to buy a home the next time they move. However, a smaller share compared to survey results from the prior year say that their primary reason for renting now is to prepare for homeownership.

Primary reason for younger renters to rent between third quarter 2012 to third quarter 2013

Our results suggest that many younger renters may continue to rent longer due to insufficient financial capability and/or preparation, despite the majority's preference for owning.

Enhanced housing education and alternative approaches to housing and savings may help renters fulfill their housing aspirations in a financially sustainable way. Educational resources and tools may help renters make more informed decisions about their housing choices and begin managing their finances early and efficiently in order to fulfill their goals. Such resources and tools may address:

     - Creating a budget for housing to ensure affordability
     - Determining when and whether to own, based on lifestyle and financial considerations
     - Creating a down payment target well in advance of a home purchase, and accumulating the
      necessary savings gradually over time
     - Meeting mortgage qualification requirements for criteria such as credit score and debt-to-income ratio

Alternative paths to homeownership may serve as a bridge for some renters. For example, about three-quarters of younger renters and owners say a lease-to-own arrangement would make renting more desirable.

Renters ultimately may view renting more favorably if it enables them to achieve certain benefits typically associated with homeownership, such as automatic savings, more control over their living space and environment, and living in their preferred school district.

Sarah Shahdad
Strategic Planning Analyst
Economic & Strategic Research

May 6, 2014

The author thanks Steve Deggendorf, Qiang Cai, Tom Seidenstein, Orawin Velz, Pat Simmons, Mark Palim, and Jon Lawless for valuable comments in the creation of this commentary. Of course, all errors and omissions remain the responsibility of the author.

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in this commentary should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.


i The time period analyzed begins at the Fannie Mae National Housing Survey’s inception in January 2010.

ii For the purpose of this analysis, “younger” is defined as age 18-39.

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What Younger Renters Want and the Financial Constraints They See