With January marking the third straight month of declining US existing home sales, today we will look at housing trends for a crucial demographic within this market: millennials. Cyclical forces like interest rates play a large role in driving demand, but demographics are the key long-term secular trend.
Why millennials are so important to the housing sector:
- Millennials (aged 37 or younger) make up the biggest share of US home buyers at 36%, 65% of which are first time home buyers, according to the National Association of Realtors 2018 Home Buyer and Seller Generational Trends report. That was up from 34% in 2017 and represents the most active generation of buyers for five consecutive years.
- Gen X (aged 38 to 52) is the next most active home buyers at 26%, down from 28% in 2017. Baby boomers (aged 53 to 71) are third at 32%. The Silent Generation (those born between 1925 and 1945) are last at 6% versus 8% in 2017.
- Our take: lower interest rates help in the near-term, but millennials will drive housing demand for the next +20 years. Their economic prospects and homebuying patterns matter more than any other demographic cohort.
Millennial trends relative to buying power and mobility from a recent Realtor.com study:
- Although millennial home buyers have a lower median purchase price ($238k) compared to baby boomers ($264k) and Gen X ($289k), “millennials are increasing their purchase price at a faster rate than previous generations, indicative of this generation starting to move beyond starter homes.”
- Millennials have been the biggest mortgage borrowers based on the number of loans originated since early 2017, overtaking Gen X. At the end of last year, millennials took on almost half (45%) of all new mortgages versus Gen X (36%) and baby boomers (17%).
Millennials also surpassed Gen X with the largest share of new loans by dollar volume (42%) as of November 2018 compared to 40% for Gen X and 17% for baby boomers.
- “In addition to increasing their buying power and taking on larger mortgages, the data shows millennials have consistently made lower down payments than other generations since 2015.” Down payments averaged 8.8% for millennials in December 2018 versus 11.9% for Gen X and 17.7% for baby boomers.
- The report notes that millennials are moving to more affordable areas with strong job markets so they have more buying power. Here are the top five markets where they currently represent +50% of the mortgages: Buffalo NY, Pittsburgh, Milwaukee, Cincinnati, and Columbus Ohio.
- The upshot: “Millennials are getting older, with better jobs and deeper pockets, allowing them to expand their collective purchase power, and hence, their footprint in the market.”
Also, one very important point: “The stereotype that millennials primarily choose to buy homes and live in large metro areas isn’t the reality. Results show millennials’ expansion is more heavily conditioned by affordability than in prior years, so their eyes are set on less traditional secondary markets where homes and jobs are now available and plentiful.”
To sum up what this means for the US housing market going forward, we found a great interview with Wharton real estate/finance professor Susan Wachter and real estate professor Benjamin Keys. Here are highlights of their thoughts:
- “Demand will likely stay depressed through 2019: Supply shortages are keeping prices high, especially in gateway cities where much of the job growth is occurring. Add to that higher interest rates, which are keeping existing homeowners from moving up the property ladder.”
That last point impacts millennials who want to buy starter homes. Wachter notes that those in their early 30s are at the peak age to switch from renting to owning so they do want starter homes. The problem: higher interest rates have deterred existing homeowners from making their next house purchase which has raised the prices of starter homes.
Like we said, however, interest rates have come down this year, which should help boost demand.
- Another issue: “Wages have not kept up with housing prices, particularly in the markets where the jobs are.” Wachter mentioned how “rents are higher now than they were in real terms in 2007”. Consequently, increasing rental costs make it tougher for millennials to save up for a down payment on a house.
- Their upshot: “It’s not going to be a great year for the housing market — [prices are] way over the market peak… What’s going to keep this market growing are millennials and the affordable Southeast… Net-net it might be a slight negative, but it’s not going to cause a recession in 2019 – the question is 2020.
Bottom line: “Millennials will be the saving grace for the housing market in 2019 — if there is a saving grace.” That, and keeping a lid on mortgage rates.
Wharton Interview: http://knowledge.wharton.upenn.edu/article/2019-real-estate/
National Association of Realtors’ 2018 Study: https://www.nar.realtor/sites/default/files/documents/2018-home-buyers-and-sellers-generational-trends-03-14-2018.pdf