Reasons to be skeptical about a millennial homebuying boom in 2016

by 09 Dec 2015
Predicting whether millennials are finally going to start buying homes in large numbers has become a seasonal sporting event for real estate experts (also something resembling a periodic parental nag). There's good reason for the abiding fixation. Millennials are the largest generation in the U.S. labor force and something akin to guppies in the housing market food chain: When a first-time buyer moves into an entry- level house, it lets the sellers upgrade. But they've been held back by housing price increases that outpace wage hikes, not to mention limited access to credit, and rising rents that make it harder to save for a down payment.

Will next year be the year that millennials finally satisfy builders and real estate agents (not to mention mom and dad) by making their presence felt in the housing market? Yes, but not to the degree that many might hope. Millennials will make up the largest share of homebuyers in 2016
This is more of a demographic inevitability than a prediction. Historically, the largest share of U.S. homebuyers have been between 25 and 34 years old. Millennials will buy one out of three homes in 2016, predicts Jonathan Smoke, chief economist for Realtor.com, a small uptick from this year. If you prefer your glass half empty, though, Zillow Chief Economist Svenja Gudell thinks the median age of first-time home buyers will hit a new high next year. In either case, Americans will continue the trend of buying their first homes later in life than they did in past decades, as the chart below shows—likely due to some mix of wage stagnation, rising housing costs, and a tendency to start families later in life. Sentiments towards ownership will improve. Accessibility won't.

For a lot of millennials, buying a home means breaking through layers of scar tissue developed during the Great Recession. That's both because the bad economy made it harder for young workers to save down payments and because of the stigma that got attached to homebuying after the mortgage bust. Eighty percent of Americans between the ages of 18 and 34 say that owning a home is part of their version of the American Dream, according to a 2,000-respondent survey published by Trulia today. That's the highest since the company started asking the question in 2010. On the other hand, access to credit and availability of affordable homes aren't improving as fast as millennial attitudes, meaning many first-time home buyers still expect to wait. At least, if they want to live in big city on the coasts.

Assuming the Federal Reserve raises interest rates in the months to come, renting may actually become a better idea than buying in California’s biggest markets. But high prices aren’t a problem in what Trulia economist Ralph McLaughlin calls the Bargain Belt—swaths of the South and Midwest where job market gains have outpaced the rise in home prices. Zillow's Gudell, meanwhile, predicts that millennial homebuyers are primed to give up on the dream of living downtown and will target homes in suburban areas with walkable cores—"mini-cities," in Gudell's parlance.

Meanwhile, McLaughlin's attempt to peg the hottest housing markets for 2016 led him to Grand Rapids, Mich., Charleston, S.C., and Riverside, Calif., in that order. Here's the rest of his top-10 list, based on job growth, low vacancies, good affordability, search data, and presence of millennials:

4. Baton Rouge, La.
5. San Antonio, Texas
6. Colorado Springs, Colo.
7. Columbia, S.C.
8. Riverside, Calif.
9. Las Vegas, Nev.
10. Tacoma, Wash.

An ownership gap will continue to widen within the millennial generation. It may seem strange that millennials are so slow to take on home ownership, since they entered adulthood at a time when buying is more affordable than renting in virtually every major market. Those same unwieldy rent payments are pushing home ownership further out of reach and eating up larger shares of young workers' paychecks that could otherwise be saved for down payments—particularly since increasing renter demand has allowed landlords to jack up rents. Rents will continue to rise in 2016, despite an increasing supply of new apartments, said Gudell. 

That underlines a widening gap on housing affordability within the age group. “Essentially, the biggest winners of the generation are purchasing homes,” said Smoke, who published survey results earlier this year showing that pay raises were the biggest catalyst for millennials buying homes. “I’ve heard anecdotally from national builders that they’re seeing millennials skipping over the idea of the traditional entry- level home and buying what you’d consider move-up homes instead.” In other words, homeownership is a better deal, but only for those millennials doing well enough to take advantage of it. The rest of the age group can look forward to rising rents.

©2015 Bloomberg News

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