October 07, 2016

Headwinds Factors that will continue to Hold Back Millennial Homeownership

by Anthony Wright

Nobody likes to point fingers but in the case of the housing industry, it’s important that we identify the key factors and demographics that are holding back a full recovery. Ever since the recession, we’ve been anticipating the housing market to recover to full strength, only to be disappointed year after year. As I look on the horizon, it appears that the situation is going to continue to grow worse before it gets better. Until these headwinds change, expect the new construction housing market to lag with slow growth.

The Millennial generation has, as of 2016, reached maturity. With their earliest agreed-upon birthdate occurring somewhere in the early 1980s, and the latest the mid-90s, millennials are now by and large adults, and effectively the most powerful demographic in the world. Not only has the labor force, consumer markets, and voting blocs become dominated by Millennials, but also the first-time home buyer segment is now dependent upon Millennials to drive home buying. Homeownership rates have dropped to their lowest rates in 30 years. According to John Burns Real Estate Consulting, the biggest drop in homeownership since 2004 has been among Millennials. In the second quarter of 2016, the homeownership rate in the United States hit its lowest point since 1965, falling to 62.9 percent. Millennials specifically were found to own homes at a rate of 34.1 percent.


Source: http://www.cnbc.com/2016/09/09/millennials-will-be-renting-for-a-lot-longer.html

The problem is not that Millennials don’t want to own homes – research has proved that Millennials are just as likely as previous generations to want to become homeowners (eventually). So with interest rates at the lowest levels in history and the job market at full employment, what are the reasons why Millennials aren’t buying? Here’s my take on the systemic factors I believe are holding back the market.
  1. Affordability – Even with interest rates at an all-time low, Millennials are incurring higher housing cost burdens than they would if they were homeowners. Due to the demand for rental housing, rents are at an all-time high. The average American’s median income of $55,589 would incur a housing cost burden of 15% to buy a typical American home (valued at $183,600 in December 2015), whereas to rent, a significant portion of Millennials are incurring a housing cost burden of 30%. With a higher housing cost burden, student loans, and flat income growth, Millennials are finding it impossible to save up the requisite down payment to become home owners. According to research conducted by Apartmentlist.com, 77% of Millennials say that affordability is their greatest barrier to home ownership. 
  2. Lack of Supply – Due to the lack of demand or the market economics for entry-level housing (smaller margins), home builders have been focusing on building homes in the luxury home segment. A recent survey conducted by the National Association of Home Builders found that 59 percent of respondents could only afford to spend $249,000 on a new home but only 35 percent of new homes started in 2015 were below that limit. Trulia reports that the number of starter and trade-up homes available has plunged 40 percent since 2012.
  3. Lack of Credit – Credit availability is measured on a quarterly basis by the Housing Finance Policy Center’s credit availability index (HCAI).  The index measures the acceptable percentage of homes that would be at risk of default. Prior to the recession in 2001-2003, a healthy index number was 12.5 percent. Today, the index level for 2016 is at 5.4 percent. This low level of risk means lenders continue to refuse to tolerate defaults and are imposing tight lending standards, making it very hard to get a loan.

The confluence of these three factors will continue to make it impossible for the housing market to recover from the recession and return to its former glory. So while we all hope that the Millennial household will eventually grow up, settle down and start a family and thus buy a home, we can’t blame them for the windy conditions that continue to impede first-time homeowners and the entry-level housing market.

What do you think? Contact me directly at Anthony.Wright@Quanex.com.
  1. http://www.curbed.com/2016/6/22/11999880/housing-study-harvard-affordability-homeownership
  2. http://www.hanleywood.com/construction-wire/falling-behind_s
  3. http://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-credit-availability-index


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Posted: October 07, 2016 by Anthony Wright Filed under: housing, market, millennials