When Will Millennials Start Buying Homes?

On today’s show we are examining home buying for the next generation of home buyers. Last week we talked about a bubble forming in the luxury home segment where older home-owners are aging out of the home market, and through a combination of affordability, sheer demographic numbers, and market taste, there is a fall in demand at the top of the market where in fact there is a shortage of homes at the entry level. 

On today’s show we are looking deeper at new buyers entering the market for the first time. 

We saw home buying rates bottom out in 2011 and 2012 for new home buyers. This was the bottom of the real estate market following the 2008 financial crisis. Young home buyers were taught that home ownership was risky. But the truth is that the opportunity of a lifetime existed in 2011 and 2012. Home prices have increased ever since. They’ve increased as banks started lending money agains, and home buyers came back into the market. Prices rose in response to the supply demand equilibrium at that moment in time. The actual number of young home buyers has increase every year since 2012. It points to a real rebound in home buying patterns. Or does it?

According to US Census data, the percentage of home ownership for the age group from 25-34 years of age was at 20% for that age group in 2006. It has fallen every year since and now sits at 15% of that age group. Despite the rebound in home ownership in the millennial group in absolute numbers, the actual percentage of home ownership participation continues to fall year over year. 

It would be easy to conclude that millennials simply aren’t as inclined to buy homes as the previous generation. But the folks at Fannie Mae decided to look deeper at the data. They measured the rates of home ownership of specific cohorts and compared them by year.  

When I asked Dr. Doug Duncan, Chief Economist at Fannie Mae about this, he had a simple answer. He concluded that Millennials tend to buy houses based on specific life events. They tend to buy houses when they get married or have babies. He is saying that people are getting married and having babies about two years later than the previous generation. But once the decision to have children kicks in, home buying isn’t far behind. 

In fact, the data in the Fannie Mae report seems to support that, along with the idea that the rebound in home ownership for a specific cohort is the best measure of current home buying sentiment. 

According to Fannie Mae, The conclusion to be drawn is that cumulative age-group rates of homeownership clearly do not represent current market behavior, and it is current behavior that drives current housing market activity.

I believe there is another simple explanation which the analysts have overlooked. Student debt in the past decade has exploded. Folks in their 20’s with an average of $39,000 in student debt are not rushing out and buying houses. 

If the national home ownership rate is 60%, which is low compared with historical norms, and millennial home ownership sits at 15%, that’s a large gap to make up. It says that the bulk of people are not buying their first home until well into their 40’s. 

So what does this all mean? It means that people still need a place to live. It means that if home ownership is falling, the demand for rental housing is only going to increase. 

We are already seeing that in some states in the country. California is seeing its rate of home ownership declining. People who grew up living in a single family home will want to live in a single family home when they grow up, even if they don’t own it.