As the largest population age group in the country and perhaps the most studied generation of all time, millennials and their purchasing habits have been closely watched by corporate America, academia, and government alike. Much of this focus has been on the generation’s housing preferences. As they have matured, millennials have shown more reluctance to enter the housing market than previous generations. However, a close examination of recent home purchases indicates that this may be changing.
The housing market nationwide finished 2017 strong. Existing home sales and median home values ended higher in December than the year’s average as a whole. Additionally, the country’s homeownership rate ticked up to 64.2% from 63.7% one year prior. The majority of this gain was driven by millennials, the oldest of whom are now in their mid-to-late thirties. Millennials accounted for 42% of all home sales in 2017. The homeownership rate for households headed by an individual 35 or younger rose to 36% last year from 34.7% in 2016.
These numbers eschew the assumptions that have long been made about this cohort. Given their historic student loan debt, tendency to put off marriage, penchant for urban living, and less-than-optimistic job outlook following the great recession, millennials were assumed to want to avoid this large financial commitment. However, some polls show that homeownership (and marriage) is something that a majority of younger renters aspire to. Perhaps we are now beginning to see these preferences manifest themselves as older millennials begin family creation, rents relative to home prices increase, and general economic conditions improve.
Demand for apartments is at 25 year high and inner-city rents have increased significantly compared to incomes, altering the trade-offs of renting vs. buying. For example, median asking prices for existing homes in the U.S. currently sit around $247,000. A mortgage payment for this home, assuming a 20% down payment and 4.5% interest, would be just over $1,000. Meanwhile, the median asking rent for one-bedroom apartments is $1,243.
Access to credit is also an important part of this equation. According to Experian’s 2017 State of Credit Report, millennial Vantage credit scores averaged just 638 (661-780 is considered Prime, 781-850 is Super Prime). Some economists pose, however, that an evolution to more sophisticated, algorithmic lending standards is bringing some millennials to the market that would have previously been denied mortgages or favorable rates on mortgages. Perhaps most importantly, though, is younger potential buyers perceiving a more stable economic future. Unemployment is holding around 4.1%, GDP growth remains steady, and consumer sentiment is high. These are all things that correlate highly with homebuying.
Obviously, a few data points do not make a long-term trend. Homeownership among all age groups still sits at historic lows, and certain financial fundamentals- wages, income stability, savings for down payments- among younger Americans will have to change before they can begin moving toward homeownership en masse. Additionally, the recent tax overhaul doubled the standard deduction, making it less likely for potential homeowners of lower-priced and mid-priced homes to decide to buy to take advantage of itemizing mortgage interest on their income taxes.
There is also a supply issue that must be considered. The majority of new home construction in the last decade has been larger luxury product with price points out of reach for most first-time homebuyers. Rising land, labor and construction costs have made it less feasible for homebuilders to build cheaper entry-level homes. The median size of new single-family homes in the third quarter of 2017 was 2,378 square feet (compared 1,525 square feet in 1973) and the average sales price by the end of the year was just under $400,000. Some think the new lower corporate tax rates could help mitigate some of the supply restriction. It’s possible that the 21% rate could give some homebuilders sufficient cushion in their margins to justify building more large-tract, mid-priced and lower-priced housing communities, particularly in relocation magnets like Dallas, Atlanta, Utah, and Arizona with their plentiful land, jobs and lower costs of living. But for now, this is purely speculative.
The narrative of millennial housing preferences so far has been dominated by headlines suggesting their affinity for urban rental living. We can see, however, that many younger Americans envision themselves as future owners. The fundamentals of a well-situated potential homebuyer- low debt-to-income ratios, confidence in job prospects, spouses and children- have been slow to develop, though. As the economy continues to strengthen and this generation continues to age, we will see how they move beyond the barriers and lifestyle tastes that have shaped their housing decisions thus far.