With recent numbers coming out on the housing market, more and more research is showing that millennials haven’t been entering the home buying market place at the same levels they did prior to the housing bubble. There’s a whole host of different factors that contribute to this, and we’re going to take a look at how the delayed purchases as well as the barriers to entry for first-time home buyers affect investors.
Why Millennials Matter
So why does it matter if the younger generation aren’t entering the market? As long as houses are being purchased that’s good right? Well, not quite. Young buyers are generally the dominant demographic for first-time home buyers, and often are a driving force to keep things afloat such as the national home ownership rate. Young buyers also put pressure on the new construction market when they enter, simply by increasing the demand. The average age of a first-time homebuyer leading up to the bubble burst was around 26, yet now lies closer to 30. While a seemingly small bump, the scenario is playing out nation wide, with especially profound examples in states that have the most rapidly increasing home values. So why is all this happening?
Barriers to Entry for First-Timers
There’s a lot going on currently that keeps this generation of young home buyers out of the market. Faltering confidence is often cited as a cause for concern, but consumer confidence has been steadily increasing, and becoming less and less of an issue. Yet the larger economic climate that produced this lowered confidence is still exerting its impact. Allow us to focus on recent graduates, since historically, this is generally the demographic most likely to purchase homes in their mid-20’s. Unemployment and underemployment rates are generally far higher for recent grads than the national average. While unemployment sits around 6.5% currently, recent graduates are seeing numbers above 10%. Factor in underemployment and it gets somewhere closer to 18%. Those that do have work are generally making less than their counterparts from previous generations, largely as a legacy of the recent recession and mismatched labor market. Add on top of this those students graduating with large amounts of student debt due to rapidly increasing tuition costs and you have a generation of potential homebuyers kicking the can of home ownership down the road due to high upfront costs that can’t be met with the all too prevalent financial reality of being a recent graduate in the United States.
The financial situation of recent graduates is only one factor though. Another legacy of the recent crisis has been stricter lending regulations. An undoubtedly beneficial move in response to the mess that occurred, yet it presents some of its own problems. Due to tighter lending standards, it’s more difficult for first-time buyers to build the credit needed. Yet even more relevant to this particular discussion, has been the large number of cash buyers that have flooded the market. With less money being lent, cash purchases are becoming increasingly popular, especially from overseas investors looking to buy up property as it appreciates in value. A buyer with an all cash offer vs. a first-time buyer with financing (first-time buyers still account for a high share of financed purchases) is an easy decision for most sellers, especially when these buyers are often coming in above asking price.
Impact on Investors
So what does this all mean for investors? Well, a couple things. In the short term, it’s largely beneficial. The factors keeping first-time buyers out of the market, chiefly the large influx in outside investors buying up property, has a ripple effect. It drives up home prices due to keeping supply limited, but also drives up demand for rental properties as more people are having to rent rather than buy. This has caused a large construction demand for apartments which in turn buoys the overall housing market (builders confidence indexes, etc). Yet long term, this can be a source of concern. Lower homeowner rates can lead to a reduction in the middle class, since homes are generally the largest asset many people own. The current climate is slowly making that less of a reality for many, and this can potentially have a larger economic impact down the road.
Interested in reading more on the subject? Here’s a couple of sources for the post. We’d love to hear from you and continue the discussion.
Kotkin, Joel.; “In the Future We’ll All Be Renters: America’s Disappearing Middle Class”; Aug. 10, 2014.
Timiraos, Nick, Stiles, Matt.; “Where Have the First-Time Home Buyers Gone?”; Aug. 18, 2014.
Zillow Inc., “As Millennials Delay First-Time Home Purchases, National Homeownership Rate will Continue to Fall“; Aug. 1, 2014.