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As the U.S. economy improves and adds jobs, younger Americans—millennials—are slowly starting to move out from their parents' basements, where a record number of them have been living for the past few years. They're not buying homes as much as they are renting them, but how much and where is crucial to know in order to understand where the housing recovery is headed.
Over the past year, all the growth in net household formations has been among renters, according to the U.S. Census. For those 35 years old and younger, their home ownership rate has fallen from 44 percent to 36 percent over the past decade, which is why construction of multi-family apartments is at the highest level in a quarter-century this year.
But back to that migration from the basement. How big is it? Millennials will spend $1.6 trillion on home purchases and $600 billion on rent over the next five years, more per person than any other generation with more of them opting for more affordable rents versus paying the big price tags to buy homes, according to a new report from The Demand Institute, a non-profit think tank operated by The Conference Board and Nielsen. Millennials will form just over eight million new households, albeit most of them rental households.
The report found the millennials do aspire to home ownership, just as previous generations did, and they will be important drivers of the housing market. The difference between them and other generations, however, is that their time horizon for home ownership will be shorter, and their aspirations have been altered somewhat simply by the fact that they came of age in the Great Recession.
"One important difference between millennials and young adults in previous decades is the unique financial challenges of home ownership today, resulting from graduating into a weak job market with growing student loan debt," said Jeremy Burbank, a vice president at The Demand Institute and Nielsen. "Many millennials are open to alternative approaches to housing finance, including single-family rentals and rent/own hybrid contracts such as lease-to-own."
And where will millennials move? The locales are now trickling in. When it comes to big cities, who better to ask than the moving companies? United Van Lines tallied up the results of the busy summer moving season and found that Chicago, Washington, D.C., Atlanta, Boston and Los Angeles led the pack of the most popular moving destinations. Washington also ranked as the No. 1 city that people are leaving, but such is the transient nature of the top political town.
While those are the major metropolitan markets, some millennials are looking for mid-size cities with great quality of life. Where should they go?
Madison, Wisconsin; Rochester, Minnesota; Arlington, Virginia; Boulder, Colorado, and Palo Alto, California, are the top five most "livable" small to mid-size cities, according to a new report from Livability.com. Researchers there looked at 2,000 cities and their amenities, demographics, economy, education, health care, housing and transportation.
Millennials will drive the future of the housing market, and while they may have just started to move out of Mom and Dad's house now, investors should know where they're headed.
—By CNBC's Diana Olick.