Photo: Robert Clark
The US homeownership rate, while improving, still hovers near an all-time low.
And while Millennials choosing to delay major life events is the easy scapegoat, the real story is a lot more complicated, according to CoreLogic senior economist Dr. Frank Nothaft.
“Right now, most macroeconomics are supporting the housing market and the formation of new households, including wage, income and job growth,” Nothaft said in a recent webinar.
American Millennials are the largest cohort forming new households, thus fueling demand for housing and entry-level homes in particular. The median age of a first-time buyer is 32-years old. But Millennials aren’t buying, they’re renting — which is keeping the homeownership rate below historic norms.
Rising interest rates are keeping some Millennials out of the home market. Nothaft predicts that rates will climb to their highest level in a decade by December 2019. And while older buyers can easily recall when rates were much higher, for Millennials a rate of 5.2 percent will be the highest of their lifetime.
“It’s really about perspective. When I was a first-time buyer, rates were over 10 percent. Millennials need to make a tenure choice. Do they want to buy or do they want to rent,” said Nothaft.
Home prices rising much faster than rents on single-family homes, which is making the choice easy for some cash-strapped Millennials. But the interest rates are also influencing sellers as well.
“The turnover rate for homes is below 15 to 20 year levels. Sellers who have a lower interest rate are reluctant to sell, which is making supply quite low relative to demand,” said Nothaft.
The longer current homeowners stay in their homes, the more pressure there is on pricing with less available inventory. And as long as prices and interest rates are up, many Millennials will find renting to be a more affordable option when forming their household.
For homes that are on the market, Nothaft says they are selling at the quickest pace in years. The month’s supply of homes for sale is at the lowest level in over a decade, and the month’s supply of median priced or cheaper homes is even less.
As a result, many homes are being sold at a “premium” price — that is, selling for above the asking price.
“When supply is low relative to demand, bidding wars drive prices up above listing,” says Nothaft.
Further exacerbating the problem, construction levels, particularly at the entry-level point, are not meeting demand. While overall home prices are up 6 percent year-over-year, they’ve risen over 8 percent in the starter home market. Overall home prices have risen 50 percent since 2012.
As long as single-family home rents continue to be lower and more stable than home prices and interest rates, first-time buyers and Millennials are likely to remain renters, added Nothaft.