Old Adages Die Hard: What Worked in the Past May Not Work Today!

More people are renting (not buying) houses, particularly millennials. The old adage that “paying rent is foolish, own your house as soon as you can” is no longer being universally followed.  Lots of reasons: cost of college education, student debt, relative cost of houses, flat wages, more flexibility and others.  Today we 327 million Americans live in 124 million households, of which 64% (or 79 million) are owner-occupied and 36% (or 45 million) are renter-occupied. In 2008, homeownership hit 69% and has been declining ever since.

It starts with the increasing cost of college.  Back in the mid 1960s, in-state tuition, fees, room and board for one year at the University of Illinois was $1,100.  Annual Inflation from 1965 to now has been 4.4% meaning $1,100 would have increased 10 times to $11,000 in current dollars.  Yet, today’s in-state tuition, room & board at Champaign is $31,000, a 28 times (or 7.9% average annual) increase.  Yes, students often get scholarships and don’t pay full price, but even a $22,000 price tag would represent a 20 times increase.

It’s no surprise that in the last 20 years, many students following the old adage “get a college education at any price” found it necessary to incur debt to complete college.  Today over 44 million students and/or their parents owe $1.6 trillion in student debt.  Among the class of 2018, 69% took out student loans with the average debt being $37,000, up $20,000 each since 2005.  And here is the sad part: according to the NY Fed Reserve, 4 in 10 recent college graduates are in jobs that don’t require degrees.  Ouch. In today’s changing economy, taking on “good debt” to get a degree doesn’t work for everyone, like it did 50 years ago.

At the same time, houses in many communities have increased in value greater than general inflation.  Elise and I bought our first house in Arlington Heights, IL in 1970 when we were 22.   It was 1,300 sq. ft., 3 bedrooms and one bath and cost $21,000.  I was making $13,000 a year as a starting CPA and Elise made $8,000 teaching.  Today that same house is shown on Zillow at $315,000.  That’s a 15 times increase in 50 years. At the same time, the first year salary for a CPA in public accounting is now, according to Robert Half, about $50,000-$60,000. Let’s use $60,000.  That’s less than a 5x increase.  Houses, on the other hand, have increased at 5.6% per year. CPA salaries have increased 3.1%.  The cost of living in that 50 years went up 3.8%. Wages, even in good occupations, have lagged inflation. Our house 50 years ago represented about one times our annual income.  Today the average home is over 4 times the owners’ income.  That makes housing a huge cost of the family budget.

In addition, today it is so much more difficult to assemble the down payment. We needed 20% or $4,200; which came from $3,500 savings we accumulated during our first year working full-time and a $700 gift from my mother. A “starter” house today can cost $250,000 or more.  20% is $50,000, which for many is more than their first year gross income.  And, from that income, they have taxes, rent, food and other expenses and, in many cases, student debt, to pay before they have money for savings. Saving 10% is great, 20% is phenomenal.  But even at 20%, that’s only $10,000 per year and they would need five years to get to $50,000.  No surprise that it is estimated the 2/3 of millennials would require at least 2 decades to accumulate a 20% down payment.

Certainly, houses can become wealth builders because of the leverage of the mortgage.  If your $250,000 house appreciates 2% a year, that is a 10% or $5,000 increase on your theoretical $50,000 down payment. But what happens when real estate markets go down as they did after the 2008 financial crisis?  The loss is increased.  Many young people saw siblings or parents suffer a big downturn in equity 10 years ago and are not ready to jump in.

Furthermore, young people who can scrape up the down payment and recognize the long term benefits of home ownership, may not be willing to commit to one house or one location for six to seven years.  With closing costs and commissions, buying, owning and selling a house in too short a period can be costly and not produce positive returns.

Lastly, many people want flexibility and don’t want to be tied to a house. They want flexibility to change locations and jobs.  They want flexibility with their time and don’t want to spend their weekends mowing the grass or perform continual repairs on the house. In changing states like Illinois, with a shrinking population and less likelihood of significant appreciation, their house can be a burden.  For them, renting provides them flexibility and peace of mind.

It’s no surprise then that the WSJ reported last week that a record number of families earning $100,000 a year or more are renting.  In 2019, 19% of households with six-figure income rented their house, up from 12% in 2006.  Rentals are not only apartment buildings around city centers, but also single-family houses.  The big home-rental companies are betting that high earners will continue renting.

Yes, the world has changed greatly in the last 50 years and it will keep changing.  When I look back, I realize we baby boomers had it awfully good.  The old adages worked for us. But today, buying a house is not the “slam dunk” decision we had years ago, nor is a college degree.  The personal financial playbook followed by past generations doesn’t add up for many people these days.  It’s time for a new plan customized for new generations and that’s exactly what we do at DWM.

HERE COME THE MILLENNIALS!

In only 12 years, 75% of American employees will be Millennials.  By then, even the last of the Baby Boomers will be 66 and on social security (though a few of us might still be working).  Generation X is a smaller cohort and some of its 54-65 year olds will already be retired.  The oldest Generation Zers will only be 34 at that time.   Yes, in 2030, the Millennials, aged 35 to 53, will be the backbone of the economy and country.

What an exciting time to be alive!  Can you imagine all the changes that may occur in the next 12 years?  Just consider that just 14 years ago Blockbuster Video had 9,000 stores and is now down to one last store in Oregon. 2004 was also the year Facebook was launched.

Yes, new reality can be exciting and challenging.  The Millennials bring with them their own expectations of life, work and values.  Those organizations and communities that embrace generational diversity will undoubtedly thrive in a volatile, uncertain, complex and ambiguous future.

Jennifer Brown, author of “Reversing the Generation Equation: Mentoring in the New Age of Work,” indicates that Millennials “possess the most diverse attitudes, tendencies and requirements of any preceding generation and they are bringing that to work and life and demanding to be welcomed, valued, respected and heard.”  They’ve grown up with being in the center of the activity and expect to stay there.

The Pew Research Center’s “Millennials in Adulthood” takes a look at just how unique this generation is and how the social, political and economic realities in their formative years have shaped them.  Due to a disconnect between Millennials and many organizations not willing to meet them half-way, it’s no surprise that Millennials have experienced greater job dissatisfaction than Generation X and Baby Boomers.

A study conducted by Deloitte showed that 56% of Millennials have “ruled out working for a particular organization because of its values or standard of conduct.”  49% have declined a task assigned to them that was thought to go against personal values or rules of ethics.  According to the study, Millennials are seeking a good work/life balance (more than monetary compensation), their own homes, a partner, flexible working conditions and financial security.  Furthermore, this group does not necessarily defer to seniority as seen in previous generations. For them, respect must be earned.  Which brings us to the concept of “Reverse Mentoring.”

Jack Welch of GE was one of the early pioneers of reverse mentoring.  Twenty years ago, as technological changes were sweeping our country, Mr. Welch encouraged 500 top-level executives at GE to reach out to people younger than them to learn about the internet.  Since then, reverse mentoring has gone beyond technological learning and expanded into ideas, advice and insights.  Organizations such as PWC and AARP are among those who have launched programs.

At PWC, the young mentors are in their early 20s and have been working long enough to understand how it works and short enough to still have a fresh perspective.  The AARP Foundation created a Mentor Up program in 2013 where teens and young adults come together with older generations to keep them current and connected with the younger world.  The young mentor the older mentees on technology and health and fitness.  They also exchange Valentine’s Day cards.  In short, intergenerational connections were made, skills exchanged, understanding obtained and mutual respect and admiration were achieved.

At DWM, we have two excellent young team members; Grant Maddox in Charleston and Jake Rickord in Palatine.  We are just starting a reverse mentoring program at DWM where Grant and Jake will be the mentors and Brett, Jenny, Ginny and I will be the mentees.  Once a month, we set aside lunch time for the mentor to share a topic, theme or idea they are interested in sharing and to explain two-way learning opportunities.  We invest time to learn, get to know one another better and increase our trust and respect for each other.  We are also starting to dismantle the old paradigm that “seniority always knows best.”

Our goal is generational diversity and respect for all.  Yes, the Millennials are coming. And, yes, they come with the most diverse attitudes, tendencies and requirements of any preceding generation.  As they say in World Cup Champion France, “Vive la Difference.”