Demographics

The Rental Generation Sees No Point in Buying


Jared Fruchtman rents his apartment and only uses Zipcar

Photograph by McNair Evans for Bloomberg Businessweek

Jared Fruchtman rents his apartment and only uses Zipcar

The day Michael Anselmo signed a lease on his first apartment in New York City, he lost his job at Buck Consultants (XRX). He spent about 10 months struggling to pay rent with unemployment benefits. Two years later he’s hesitant to buy a bike, let alone try home ownership.

“Every decision that I have made since I lost my job has been colored by that insecurity I feel about the future,” says Anselmo, 28, who rents an apartment in Austin, Texas, and works as a consultant for UnitedHealth Group (UNH). “Buying a house is just further out on the timeline for me than it used to be.”

Confronting a jobless rate above 8 percent since 2009 and grappling to pay off student loans worth about $1 trillion, according to the Consumer Financial Protection Bureau, 20- to 34-year-olds are renting apartments, cars, and even clothing to save money and stay flexible.

As the Great Depression shaped the attitudes of a generation from 1929 until the early years of World War II, so have the financial crisis and its aftermath affected the outlook of young consumers like Anselmo, says Cliff Zukin, a professor of public policy and political science at Rutgers University in New Jersey.

“This is a generation that is scared of commitment, wants to be light on their feet, and needs to adjust to whatever happens,” says Zukin, who has researched the effects of the recession on recent college graduates. “What once was seen as a solid investment, like a house or a car, is now seen as a ball and chain with a lot of risk to it.”

One key difference is that technology now allows companies to provide younger consumers access to what they want, when they want it, and at a reduced cost, says Paco Underhill, founder of Envirosell, a consumer behavior research and consulting firm. “Renting is something that is in play that wasn’t in play during the Great Depression,” he says. “To a modern generation, ownership isn’t about having it forever, it is about having it when you need to have it,” says Underhill.

Enterprise and Hertz (HTZ) are expanding in what the Santa Monica (Calif.)-based research firm IBISWorld estimates to be the $1.8 billion hourly-car-rental business, a segment dominated by younger drivers and popularized by Zipcar (ZIP). Startups such as Rent the Runway are supplying high-fashion apparel to satisfy those who want to wear, not own. Cort, a unit of Warren Buffett’s Berkshire Hathaway (BRK/A), is increasing its marketing efforts to rent furniture to college students and fledgling households, says Mark Koepsell, a senior vice president at Cort.

“Renting makes a lot of sense,” says David Blanchflower, professor of economics at Dartmouth College in New Hampshire. “They have no money and they are not buying the things they normally buy when they set up homes. Their incomes are a lot lower.”

According to a May study by the John J. Heldrich Center for Workforce Development at Rutgers, the median starting salary of those graduating between 2009 and 2011 was $27,000, $3,000 less than 2007 levels. For the majority of students, the median debt owed to pay off their education was $20,000. Forty percent of the 444 college graduates surveyed said that debt was making them delay large-scale purchases, such as a house or car.

Even as the housing market shows signs of revival, the slow pace of recovery is keeping the younger generation fearful of investments rather than confident about building wealth for the future, says Jeffrey Lubell, executive director for the Center for Housing Policy. First-time home buyers in 2011 accounted for the smallest percentage of the total since 2006. The vacancy rate of U.S. rental properties is at its lowest level since 2002.

The shifting attitudes pose a threat to retail sales, says Candace Corlett, president of WSL Strategic Retail. Younger consumers are already very comfortable buying used items and borrowing from friends. Renting only reinforces that tendency. “In a post-recession economy where retailers are trying to make every shopper count, it’s the wrong direction,” she says. Retail sales fell in June for a third consecutive month, the longest period of decline since 2008.

Jared Fruchtman, 25, says using Zipcar saves him about $600 a month to spend on dinners out, cab rides, and weekend trips. “It wasn’t financially worthwhile to buy or lease a car right now,” says Fruchtman, who is studying to be a certified public accountant and lives with his girlfriend in a rented apartment in San Francisco. “I never considered buying,” he says.

Rent the Runway rents high-fashion gowns and other couture online for around 10 percent of the purchase price. President Jennifer Fleiss, 28, says its business model is “almost recession-proof.” Since its launch in 2009, the company has grown to about 3 million online members and is adding approximately 100,000 per month, she says. Rent the Runway members typically range from 15 to 35 years old.

A generational change in attitude isn’t the only reason young consumers aren’t buying. Stricter lending practices and higher down payments on houses and cars are crowding out buyers, says Dartmouth’s Blanchflower.

For those who choose renting over buying, there’s a price to pay. By forgoing purchases of assets like homes, young people are giving up on a chance to build wealth, says Lubell of the Center for Housing Policy. “What you are seeing is a delay in all the kinds of decisions that require a long-term, financially stable future,” Lubell says. “That’s home purchases, that’s marriage, and that’s having kids.”

Anselmo, the health consultant who rents an apartment in Austin, says he understands such arguments. Even so, he can’t bring himself to buy a house. “The logical person in me gets pissed off when I write a check every month and it just goes down the drain,” he said. “But we are very hesitant.”

The bottom line: Lower incomes and loan barriers have made renting a logical choice for most of today’s college graduates.

Fairchild is an intern for Bloomberg News in Washington.

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Companies Mentioned

  • XRX
    (Xerox Corp)
    • $13.37 USD
    • 0.02
    • 0.15%
  • UNH
    (UnitedHealth Group Inc)
    • $98.54 USD
    • 2.69
    • 2.73%
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