By Erin McQuilkin
The classic dream of first time home purchase is marooned in a vastly changing landscape. Our world has experienced a dramatic transformation since the mid century when home purchase was a rite of passage. As generations flowed past the epochs of the Baby Boomers and Generation X, we’ve entered the phase of the millennials.
Millennials, those born between 1981 and 1997, have alternative notions of the ideal life when compared to preceding eras. Their focus is on quality of life, mobility, creatively fulfilling jobs and personal time instead of security, retirement and home purchase.
As the drive to secure a first-time home has lessened for millennials, rates of homeownership have dropped to a 20-year low of 34.7% as of December 2015 with only one out of three owning a home in 2018. What are the reasons for this deceleration in the housing market?
The Rising Affordability Gap
Two of the fundamental reasons for the decline are the expanding affordability gap and surging home prices. The home affordability index for first-time homebuyers in the US fell to 92.5 in 2018 from 109.3 in 2015, demonstrating the increased difficulty for millennials to purchase a median-priced home compared to their wages. Home prices also skyrocketed, especially in desirable areas, with only 67% of homes within this generation’s target affordability.
This shows millennials as the unfortunate recipients of a market severely lacking in cost-effective housing. The tendency of this generation to cluster around prohibitively priced urban areas rather than moving out to more economical suburban housing isn’t helping the situation. Builders and developers take note, there is an urgent need for reasonably priced housing to enable millennial’s with the acquisition of a home.
Millennial Debt Crisis
One of the major weights millennials are toiling under is their exorbitant debt levels with 71% of potential buyers stating that student debt deterred them from home purchase. They have been saddled with a heavy yoke since the average level of student loans was $19,000 USD in 2016 compared with $12,800 USD for Gen X. Personal debt also advanced to an average of $27,900 USD. This younger group’s new version of “Keeping Up with the Joneses” and an over-reliance on credit cards, leaves them more cash strapped with fewer options than their forebearers when it comes to acquiring lending.
There is a severe problem on our hands from universities being turned into for-profit businesses. As a member of Generation X, I struggled for ten years after school to close my own student debts, while barely earning enough to cover daily expenses. Outside of the US, universities are often lower cost, even free in some countries. Young adults should be encouraged to pursue their goals in education without being punished with a lifetime of debt. If we could enact this change, it would be a blessing to the entire society, not just the pockets of schools run as revenue machines.
Outside of the debt disaster and escalating home costs, the ethos of millennials is a driving force in the decrease of home purchases. Millennials prefer mobility and time to enjoy life over the responsibilities and maintenance of a home, and the market is feeling the shift. Long term leases are on the rise with single homes built for rental in 2018 numbering 43,000. Renting is an easier way of life for this socioeconomic group, and as boomers attempt to sell their sizeable dwellings for fewer duties and lower maintenance, they are not being bought by millennials who want smaller residences for the same reasons. Another significant influence on their behaviour is the delay in settling down with a partner. Marriage rates fell from 52.3% in 1990 to 38.5% in 2015, and with no partners or children, the impetus for having their own home has dwindled.
Although these trends may have taken other generations by surprise, I can relate to the evolving ideologies of millennials. This woke tribe realizes we’re here to savour this life for a brief moment. Taking their freedom in their hands and navigating their own path is a powerful and progressive stratagem.
Millennials have surged into cities with 88% living in cosmopolitan areas as of 2018. These young adults prefer living in metropolitan locales with the variety of amenities readily available to them versus the suburban and rural lifestyles of previous generations. The tendency to gravitate to highly desirable urban pockets, where there is already a shortage of housing, has the effect of driving up rental prices across the real estate market, making the chances of home purchase more elusive. This trend is auspicious for the revival of cities across the globe but not promising for less populated towns. Either way, millennials know what they like, and I can’t blame them. Modern metropolis have an abundance of culture, shopping and general convenience that makes them hard to walk away from.
Scarcity Of Loans
Millennials who do make the moves to purchase a home may find a loan market that feels unfriendly toward first-time homeowners. Banks have tightened credit underwriting to reduce their risks, and six out of 10 millennials now report rejection when applying for credit cards, mortgages and other loans.
Obtaining mortgages is difficult. Even if they can get a mortgage for less than 20% down, there are often exorbitant interest rates or private mortgage insurance on top of their loan repayments. All this regulation and tightening is understandable after the 2008 housing crisis, but not great news for millennials hoping to buy homes. It appears that the sloppy lending and Wall Street greed of previous generations have come home to roost on millennial’s credit, which is an unjust reality.
Will The Market Adjust?
Millennials are a groundbreaking generation in terms of the way they live their lives and what they value, which has trickled down to affect the rate of home purchases negatively. Clearly, change needs to come to the housing market to make home purchases more feasible for this and future generations. Modifications in lending and housing availability should become a priority for governments and developers. Construction of more attainable housing with an amiable lending environment and lower student loan debt would open the market for this group and subsequent eras. After all, millennials should be given the same chance to attain a home as boomers or gen x.
If real estate developers are paying attention, this is an enormous market whose needs aren’t being met. I think it would be a wise choice for businesses to learn about millennial tastes and provide options to help them achieve their housing goals.