Waiting for the Millennial
Real Estate Boom
Lauren Curtis considers herself “really lucky” that she and her husband were able to put together the money for a down payment on their co-op in Park Slope, Brooklyn.
“We hadn’t been looking to buy at the time, but the circumstances arose,” says the 26-year-old. “Now our mortgage, plus the maintenance for the building, is definitely less than what we were paying in rent.”
In fact, Curtis is in the lucky minority of her generation.
The homeownership rate among Millennials — roughly the under-35 crowd — fell to 36.2 percent during the first three months of the year, the lowest level since the Census began tracking the age of homeowners in 1982.
Since peaking at 43.6 percent in 2004, the rate has been trending down along with the overall U.S. ownership levels since the economic crisis. Yet while the rate for all ages has declined to the lowest level in nearly a decade, at 64.8 percent, it hasn’t suffered nearly the drop that the Millennial generation has experienced.
Millennials are facing a stronger crosscurrent of headwinds — both economic and social — from crushing student loan debt and higher unemployment to tighter lending standards and a tendency to marry later in life.
Scarcity of Jobs
Ownership is cyclical, and there are few factors more relevant than the health of the job market. With the unemployment rate among 20- to 24-year-olds stuck above 11 percent, according to the Bureau of Labor Statistics, it’s not surprising that many young adults aren’t frequenting open houses.
Older Millennials, age 25 to 34, are faring better — with a jobless rate of 6.7 percent. Yet that’s still above the national average of 6.3 percent.
“Deciding whether to rent or buy is dependent on whether you’ve got a job,” says Jed Kolko, chief economist at Trulia, the online real estate marketplace. “Young adults are still more likely to be living with parents now than before the recession.”
Piling on the Debt
Millennials are also weighed down by more student debt than past generations, presenting yet another obstacle to homeownership. The number of 25-year-olds with student debt continued to rise last year, according to the Federal Reserve Bank of New York. The average debt load has doubled in the past 10 years to $20,926, and student loan debt can’t be expunged in bankruptcy.
Perhaps more importantly, the central bank’s economists found that 30-year-olds with a history of student debt now have a lower homeownership rate than their debt-free counterparts. For more than 10 years until 2011, student borrowers were much more likely to own a home, a trend the Fed economists note was “typically explained by the fact that student debt holders have higher levels of education on average, and hence, higher income potential.”
The reality today is that having tens of thousands of dollars in student debt makes it difficult to save for a down payment.
Jeff Daddio, who bought a home with his wife in South Boston, MA last year, says his $100,000 pile of student debt delayed the purchase and limited what he could put down.
“I feel like I’m living pocket to mouth because all my money goes to paying off debt,” says the 27-year-old. “Without that debt, I’d be financially secure.”
A Higher Bar
Since the economic crisis struck in late 2007, mortgage lenders have become more strict — especially for first-time buyers.
“With mortgages more difficult to qualify for, Millennials have been hit the hardest because they haven’t built up equity,” says William Frey, a sociologist specializing in U.S. demographics. “This, as well as their continued underemployment and heavy student debt, is keeping their household formation, homebuying and migration rates at low levels.”
Lenders are working in a more tightly regulated environment, with higher hurdles for originating loans they can sell to certain investors. Adjustable rate mortgages (ARMs) now have to be underwritten at the maximum rate to which interest rates on the mortgage could reset in the first five years. Additionally, the Qualified Mortgage (QM) rule now stipulates a maximum ratio of debt to income for a qualified mortgage, which has limited underwriting flexibility.
Higher lending standards have helped upgrade the financial profile of first-time buyers. While the median age of the first-timer has remained around 31 since before the crisis, according to home buyer profiles compiled by the National Association of Realtors® (NAR), the median income has jumped by more than half to $67,400.
There are avenues still available for younger buyers, such as getting a gift from a relative. Federal Housing Administration-backed loans, which only require a 3.5 percent down payment, are also popular. The NAR survey showed that nearly 40 percent of first-time buyers took out FHA loans last year.
Yet Trulia’s Kolko says that while the FHA is a viable option, there’s little doubt that “banks are more reluctant to take risks than in previous decades.”
Life Gets In the Way
Beyond the list of economic hurdles that have hampered the ability of Millennials to buy a home, there also has been an attitude adjustment about another major life decision — marriage.
Only about a quarter of Millennials are married, according to a recent study by the Pew Research Center. By comparison, more than a third of Gen Xers were married when they were the same age, along with nearly half of Boomers.
That matters because married couples have more buying power, which translates into a higher ownership rate. Married couples now comprise two-thirds of new buyers, according to NAR, the highest rate in a dozen years.
Luke Kauffman was 23 and single when he bought his first home in Lancaster, PA several years ago. Few of his friends have followed suit, however.
“Some of my friends got married, have a child on the way and have their first home,” says the now-27-year-old, noting that most of his other friends rent.
Millennials are more likely than older renters to prefer ownership, with a majority surveyed by Fannie Mae last year citing both lifestyle and financial reasons. Yet, nearly as many said renting is less stressful than buying.
The Future of Homeownership
So what does the future housing market hold for Millennials?
With the job market improving, Kolko expects many of the so-called Boomerang Generation — those Millennials who were forced to move back in with their parents — to start getting on with their lives. Many of them are moving into rentals for now, but rising home prices are also encouraging more homeowners to sell.
“More inventory will help Millennials looking to buy,” says Kolko.