After reading the Bloomberg article “
Recession Generation Opts to Rent Not Buy Houses to Cars” use
the five determinants of price elasticity of demand (PED) to characterize the PED for new houses and
new cars. How does the new hourly car rental business affect the PED for cars? How has the recession
affected the PED for cars and houses—especially for young adults? Use a graph to illustrate one of your
answers (showing changes in PED for housing or cars).
Graphs can either be drawn using a program
(Word or Paint), or you can draw the graphs by hand and scan them into your computer.
Recession Generation Opts to Rent Not Buy Houses to Cars
By Caroline Fairchild | Bloomberg – 11 hours ago
The day Michael Anselmo signed a lease on his first apartment in New York City, he lost his job at Buck Consultants LLC. He spent about 10 months struggling to pay rent with unemployment benefits. Two years later he’s still hesitant to buy a home or even a road bike.
“Every decision that I have made since I lost my job has been colored by that insecurity I feel about the future,” said Anselmo, 28, who now rents an apartment in Austin, Texas, and works as a consultant for UnitedHealth Group Inc. “Buying a house is just further out on the timeline for me than it used to be.”
Anselmo and many of his peers are wary about making large purchases after entering adulthood in the deepest recession and weakest recovery since World War II. Confronting a jobless rate above 8 percent since 2009 and student-loan debt hitting about $1 trillion, 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, said Cliff Zukin, a professor of public policy and political science at the Edward J. Bloustein School of Planning and Public Policy at Rutgers, the state university of 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,” said Zukin, who’s 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, said Paco Underhill, founder of New York-based consumer-behavior research and consulting firm Envirosell.
“Renting is something that is in play that wasn’t in play during the Great Depression,” he said. “To a modern generation, ownership isn’t about having it forever, it is about having it when you need to have it,” said Underhill, who has studied shopper behavior.
Enterprise Holdings Inc. and Hertz Global Holdings Inc. (HTZ) are expanding in what the Santa Monica, California-based research firm IBISWorld estimates to be the $1.8 billion hourly car- rental business, a segment dominated by younger drivers and made popular by Zipcar Inc. (ZIP) Startups such as Rent the Runway Inc. are supplying high-fashion apparel to satisfy those who want to wear, not own. CORT, a unit of Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), is increasing its furniture-rental marketing efforts to college students and fledgling households, said Mark Koepsell, CORT’s senior vice president.
“Renting makes a lot of sense,” said David Blanchflower, professor of economics at Dartmouth College in New Hampshire and a Bloomberg Television contributing editor. “They have no money and they are not buying fridges and they are not buying the things they normally buy when they set up homes. Their incomes are a lot lower.”
College graduates earned less coming out of the recession, according to a May study by the John J. Heldrich Center for Workforce Development at Rutgers. Those graduating during 2009 to 2011 earned a median salary in their starting job $3,000 less than the $30,000 seen in 2007. The majority of students owed $20,000 to pay off their education, and 40 percent of the 444 college graduates surveyed said their loan debt is causing them to delay major purchases such as a house or a car. The U.S. Consumer Financial Protection Bureau said in March it appeared student loans had reached $1 trillion “several months” earlier.
The U.S. economy shrank 4.7 percent from December 2007 to June 2009, making it the deepest and longest slump in the post- war era. In the three years since the recession ended, the economy has expanded 6.7 percent, the weakest recovery since World War II.
Even as the housing market shows some 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, said Jeffrey Lubell, executive director for the Center for Housing Policy, based in Washington. First-time home buyers in 2011 accounted for the smallest percentage of the total since 2006, according to the National Association of Realtors. The vacancy rate of U.S. rental properties is at its lowest level since 2002.
The shifting attitudes also pose a threat to retail sales, said Candace Corlett, president of New York-based retail- strategy firm WSL Strategic Retail. Younger consumers are already comfortable buying used items and borrowing from friends. Renting will only reinforce their tendency not to buy new.
“In a post-recession economy where retailers are trying to make every shopper count, it’s the wrong direction,” she said. Retail sales fell in June for a third consecutive month, the longest period of declines since 2008.
The by-the-hour segment accounts for about 6 percent of the $30.5 billion U.S. car-rental market, a share that is forecast to rise to about 10 percent in five years, according to IBISWorld.
St. Louis-based Enterprise, the largest U.S. car-rental company, expanded in the segment in May by acquiring Mint Cars On-Demand, an hourly car-rental firm with locations in New York and Boston. Half of Enterprise’s customers in this segment are under 35, according to company spokeswoman Laura Bryant.
Hertz, which began renting cars by the hour in 2008, plans to equip its entire 375,000-vehicle U.S. fleet with the technology for hourly rental within about a year, said Richard Broome, senior vice president of corporate affairs and communications for the Park Ridge, New Jersey-based company.
“It made sense to reach the younger demographic to get involved in car sharing,” Broome said. Those 34 and younger make up 84 percent of Hertz’s by-the-hour customer base, he said. “The higher costs of insurance, the higher costs of fuel, the economics would lead someone to conclude that it’s a better decision to rent the car or do car sharing than it is to own a car.”
Zipcar, the Cambridge, Massachusetts-based company that joined the market segment in 2000, says it now has about 731,000 members and more than 11,000 vehicles worldwide. More than half of Zipcar’s customers are under 35, said Mark Norman, the company’s president and chief operating officer.
“Whether it’s movies by the month, music by the song or formal wear by the occasion, all of those are a smarter way to think about consumption, and Zipcar fits into that really well,” he said. Zipcar’s shares have dropped 43 percent this year under the threat of the new competition.
While sales of new cars are rebounding, 18-to-34-year-olds accounted for 11.8 percent of vehicle registrations for new cars in the five months through May, compared with 16.5 percent in May 2007, according to data from R.L. Polk & Co., an auto- industry research company based in Southfield, Michigan.
Jared Fruchtman, 25, said using Zipcar gives him about $600 more a month to spend on dinners out, cab rides and trips on the weekends.
“It wasn’t financially worthwhile to buy or lease a car right now,” said 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 said. “It didn’t make sense to tie ourselves down right now.”
That attitude extends to clothes. Rent the Runway, a website that offers high-fashion gowns and other couture for around 10 percent of the purchase price, is also targeting younger consumers. President Jennifer Fleiss, 28, said its business model is “almost recession proof.” Since its start in 2009, the company has grown to about 3 million online members and is adding approximately 100,000 per month. In May 2011, the New York-based company raised $15 million in venture capital from outside investors, said Fleiss. Rent the Runway members typically range from 15 to 35 years old, she said.
Lindsay Abrams, 22, started working in 2009 as an on-campus representative at Vanderbilt University in Nashville, Tennessee, one of 175 colleges with company-sponsored teams to drive brand awareness.
“The recession has been an important part of Rent the Runway’s popularity,” said Abrams, who has rented about 15 dresses and is now a customer communications associate for the company. “For people my age, the new thing is renting versus buying. It is a great way to save money.”
Furniture companies are also getting in on the act. Chantilly, Virginia-based CORT, the world’s largest provider of rental furniture, boosted its efforts in 2009 to reach college students and younger customers.
Koepsell, the senior vice president, said the company was “foolish” not to aim for the market earlier. Last year, CORT provided furniture to about 15,000 students and predicts that number will grow to 25,000 this year.
Among CORT’s customers is Michael Ferraiolo, a 20-year-old senior at Virginia Tech, who pays $198 monthly for everything from beds to a coffee table to furnish the rented townhouse he shares with two roommates in Blacksburg, Virginia.
“With the job market such an uncertainty, none of us know where they are going to end up,” Ferraiolo said. “Now, more than ever, you see people moving around in different job markets all throughout their career. We just don’t know what to expect.”
Shifting attitudes about larger purchases aren’t the only reason preventing young consumers from buying. Stricter lending practices and higher requirements for down payments on houses and cars are crowding out buyers, Blanchflower, the Dartmouth economist, said.
For those who choose to rent not buy, there’s a price to pay, said Lubell of the Center for Housing Policy. By foregoing purchases of assets like homes, young people are giving up on a chance to build wealth, he said.
“What you are seeing is a delay in all the kinds of decisions that require a long-term financially stable future,” Lubell said. “That’s home purchases, that’s marriage and that’s having kids.”
Anselmo, the health consultant who rents an apartment in Austin, Texas, 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 check every month and it just goes down the drain,” he said. “But we are very hesitant.”
To contact the reporter on this story: Caroline Fairchild in Washington at
To contact the editor responsible for this story: Christopher Wellisz at