For the past decade, real estate developers and economists alike have grappled with a big conundrum: When will the experience-obsessed, high-saving, late-to-marry millennials purchase homes — if ever? If you’re in the housing business, this question is first and foremost on your mind — or at least it should be. Because one of the largest generations in American history has very different housing preferences — and spending capacity — than their parents did.
Getting to the answer requires as much social analysis as economic.
The homeownership rate for the first quarter of 2019 was 64.2%, unchanged from a year ago and down 0.6% from the prior quarter, according to data from the U.S. Census Bureau. As we contemplate what the U.S. housing market will look like going forward, it is imperative to consider the demographic profile of the country.
The eldest of the 74 million millennials are entering their 38th year. This cohort constitutes the largest share of U.S. homebuyers at 37%. Of this figure, the majority are first-time homebuyers, according to the National Association of Realtors 2018 “Home Buyer and Seller Generational Trends” report. The aging of this cohort into peak consumption age of 35-44 should logically create a demand tailwind for the housing industry for the next 5-15 years. However, there are several persistent headwinds that impede their buying power. In fact, despite record low interest rates, the homeownership rate among those under age 35 fell 1.1% during this year’s first quarter, reversing the 2018 increase.
Strict borrower qualifications and high student debt have prevented many millennials from transitioning from renters to homeowners. At the same time, lean supply has driven home prices significantly higher as wages have remained stagnant. Housing starts were down 14.2% from their March 2018 rate, and building permits fell 7.8% year over year. With household formation outpacing housing starts, there is reason to assume further appreciation of existing housing stock. That said, there was an annualized increase of 458,000 in renter households last month, with just 337,000 starts year over year — suggesting that renting will not get any less expensive versus owning any time soon.
Home values have already appreciated roughly 50% since 2012, with many of the historically affordable markets posting more dramatic increases through December 2018. According to Zillow, previously affordable markets like Denver (+90%), Atlanta (+84%,) Nashville (+78%), and Dallas (+76%) have seen home prices appreciate faster than incomes, with national nominal wage growth of just 18.6% over the same period. The affordability problem continues to plague millennials in particular, as high land and labor costs are forcing builders to build large homes that price first-time buyers out of the market. According to a study from Realtor.com, millennial homebuyers have a lower median purchase price ($238,000) compared to baby boomers ($264,000) and Gen X buyers ($289,000). So even as the millennial generation enters their prime homebuying years by historical standards, the type, size and price of the majority of homes constructed homes leave many would-be purchasers in the rental market.
So those of us who need to anticipate the demand for housing three to five years out (and whether that housing must target renters, buyers, and at what price) are left scratching our heads. Will the millennial renter trend ever subside?
The reality is that millennials will purchase homes — but they will do so in the same way our generation does everything: on our own terms. This is because the average millennial gets married at the age of 29. That’s nearly a decade later than their parents did. With singles less likely to own homes than married couples, it is not surprising that the majority of the cohort has spent the last 10 years renting. The average millennials today are in their early thirties, and have been married for two to three years. Those not overly burdened with student debt have saved together and are starting to have children. Make no mistake about it: Millennials will dive into the single-family home market — and they will transform it.
These buyers are going to want smart homes, smaller spaces that are well appointed and innovative builder/community maintenance options so they can focus on things more important than yard work (after all, this is the generation tasked with finding the answers to climate change, water shortages, income inequality, wars, mass violence, animal abuse and every kind of intolerance). So for those real estate professionals out there lamenting the death of the American Dream, hit the brakes on your Tesla. It’s alive and well; it’s just been asleep for a decade.
And if you’re wondering what will happen to the apartment supply that has been constructed during the past decade, the generation behind millennials is quickly making its foray into the workforce. Born between 1995 and 2010, Gen Z, represents the largest share of the U.S. population (27%) and is the most ethnically diverse by far. In the last nine years since the start of the housing recovery, student debt has more than doubled. Even more so than millennials, this generation has been plagued by massive debt and is delaying marriage. So all those shiny new apartments aren’t going to sit vacant anytime soon.