Photo: Robert Clark
The homeownership rate in the US remains at near historic low levels, and one of the chief causes is Millennials’ delaying of “major life events” like buying a home. Many Millennials have remained on the sidelines in the housing market, but that could be about to change — and this might have a major impact on a housing market that is struggling to meet current demand.
Over the last decade, the number of young American homeowners has dropped significantly. According to Fannie Mae, the homeownership rate among Americans between the ages of 25 and 44 declined 10 percentage points over the last 10 years. The financial crisis, tougher lending policies, as well as student loan debt have all contributed to delayed homebuying activity by Millennials.
But as they continue to age, Millennials are becoming more ready to settle down and finally take the leap into homeownership.
First American, a provider of title insurance, settlement services and risk solutions for real estate transactions, and the government sponsored mortgage lender Fannie Mae recently published separate studies on the topic of Millennials and homeownership.
Here are 4 major takeaways from those studies:
1. Housing Demand
Millennial demand for housing drove May’s potential existing home sales up, according to First American’s data. Potential existing home sales, which includes single-family homes, townhomes, condominiums and co-ops, increased to a seasonally adjusted annualized rate of 5.72 million, up 1.8 percent from the previous month.
This was a 90.3 percent increase from the market potential low point reached in December 2008, First American says.
“As more and more Millennials marry and have children, among the strongest determinants for the desire to be a homeowner, demand for housing will remain robust,” says First American Chief Economist Mark Fleming.
2. Housing Supply
Demand for housing continues to outpace supply. Many current homeowners are “prisoners” in their homes, afraid to sell because they believe they will not be able to find an affordable home to move into. This is contributing to the lack of available housing on the market.
Starter homes, which are favorable to first-time homebuyers, are particularly in short supply.
Citing data from the National Association of Realtors, First American says that the number of existing homes for sale has declined for the past 23 consecutive months, and is now 9 percent below last year’s level.
“Increasing shortages of homes for sale is a growing problem for potential home buyers, especially potential first-time home buyers today, as it causes affordability to decline,” Fleming writes.
3. Home Prices
First American used this simple formula to describe current housing market conditions in the US: lower inventories + high demand = declining affordability. With fewer homes for sale, and more aging Millennials ready to enter the home market increasing demand, home prices are on the rise.
Home prices rose just under 6 percent year-over-year in May, the fastest pace since July 2014. Affordability is a top challenge for first-time buyers.
Still, national mortgage and unemployment rates remain low, and national wage growth is on the rise. These conditions could still attract Millennial homebuyers, keeping both demand and prices high, says First American.
“Economic conditions that favor Millennial household formation will continue to drive strong demand, despite decreasing affordability,” Fleming says.
There’s little doubt that Millennials homebuying activity will have a major impact on the overall market. But, over the next 20 years, there are some significant factors that could affect the national homeownership rate.
Fannie Mae determined there was a correlation between higher education and higher annual salaries. Higher education and salary gains could make homeownership more accessible to some Millennials, which might in turn raise the Millennial homeownership rate by 1.5 percentage points in the next 20 years.
Closing racial gaps on education could also boost the Millennial homeownership rate, perhaps by as much as 2.5 percentage points over the next 20 years. Presently, only 17.7 percent of Hispanic heads of households have a bachelor’s degree or higher, compared to nearly 58 percent of Asian heads of households.
Perhaps most promising, Fannie Mae predicts that if the US were to close racial gaps on education, and push for higher education among Millennials, the homeownership rate among Millennials could rise as much as 7 percent over the next 20 years.
“The overall effect of higher education is found to have been substantially more important for homeownership in the years since the Great Recession than it was in the pre-recession period,” writes Fannie Mae.
The percentage of Americans attaining a bachelor’s degree has been steadily rising since the 1990s, according to Fannie Mae, which bodes well for the housing market.