By Saeculum Research
According to the latest quarterly report by the National Association of Realtors (NAR), U.S. median single-family home prices jumped up 7 percent year over year in Q1 2017, fueled by the strongest quarterly sales growth in a decade.
With the housing market mounting a comeback, many analysts are pegging 2017 as the year of the Millennial homebuyer.
There’s less, alas, to this story than meets the eye. While rates of household formation and homeownership are up (at least marginally) among older generations, neither rate is rising for Millennials. If it weren’t for the sheer size of the cohorts now nearing age 30, the floor under young-adult demand for housing would be falling. Bottom line: If Millennial behavior doesn’t change, the out-year prospects for housing are less favorable than most experts suggest.
Most housing indicators are up to start the year. Single-family home prices rose in 85 percent of major metros YOY in Q1 2017, while home sales are on an upswing. This recovery somewhat softens the blow of a lagging multifamily market. (See: “The Housing Market’s Slow Train to Recovery.”) Likewise, sentiment data are bullish. Fannie Mae’s monthly Home Purchase Sentiment Index rose to 86.7 in April, while the National Association of Home Builders/Wells Fargo Housing Market Index jumped 12 points YOY in May.
What’s fueling this growth? Mostly, the single-family home market is expanding at the expense of the once-hot rental market. Strengthening family balance sheets (see: “A Good Year for Middle America”), improving credit scores, still-low interest rates, and soaring rents have all made homeownership ever-more appealing. Many housing forecasters and homebuilders have spotlighted Millennials as the driving force behind this rebound. Fannie Mae’s Doug Duncan reports that, in Q1 2017, “Millennials showed especially strong increases in job confidence and income gains, a necessary precursor for increased housing demand from first-time homebuyers.” Meanwhile, a recent headline in The Wall Street Journal calls starter homes “The Next Hot Housing Market.”
But there’s no cause for celebration yet. A look at the data indicates that Millennials’ participation in the home rebound has been overstated.
Let’s examine the primary drivers of housing demand growth. First is the rate of household formation. The more people who form new households via buying or renting (for whatever reason: graduating college, leaving home, or separating from friends or from a spouse), the greater the total demand for housing units.
Over the last several years, the number of U.S. households has gradually risen, but this climb has been entirely driven by a surge in new older households. Census data show that the number of households under age 45 has been virtually stationary since 2009—and remains 3 percent lower than it was in 2007. A slight demographic bulge in the 30-34 bracket (up 8 percent since 2007) has been overwhelmed by the demographic Xer bust in the 35-44 bracket (down 7 percent) and late bloomers in the under age 30 bracket (down 3 percent).
Meanwhile, households in every age bracket over 55 have surged. Late-wave Boomers have pushed the 55-64 bracket up by 24 percent; more affluent early-wave Boomers have pushed the 65-74 bracket up by 47 percent. It’s not just that Boomers are a large generation. As we’ve mentioned before (see: “Boomers Go Solo”), individualistic Boomers are behaving differently as seniors: They’re still divorcing and buying vacation homes; they’re adamantly refusing to enter institutional care, and they’re often becoming “heads” of the very households in which their adult Xer and Millennial kids are living.
The other force driving the warming housing market is the new trend away from renting and toward the purchase of homes. In Q1 2017, the United States added more new-owner households than new-renter households for the first time since 2006. Likewise, according to Fannie Mae, 42 percent of all homebuyers so far this year have been “first-time buyers” (defined as those who have not owned a home in three years)—up from just 31 percent in 2011.
But let’s keep this trend in perspective. Over the last year, it has halted the overall decline in the U.S. homeownership rate. But it has not yet raised the rate, either overall or for any age bracket. Census data reveal that 63.5 percent of householders owned their home in Q1 2017, statistically unchanged from Q1 2016. Ditto for Millennials under age 35: 34.3 percent, unchanged from a year earlier.
Yes, “first-time buyers” are up. But many of these, according to Fannie Mae’s definition, could be Xers jumping back into the market for the first time since the recession. And yes, new home sizes are getting smaller. But this could be in part a response to the demand from downsizing Boomers, who often gobble up the smaller new homes built for young families.
Why aren’t more Millennials taking the plunge? This generation’s stagnant real wage growth and rising student debt burden has largely kept them out of the market. A 2016 NAR report found that 71 percent of all non-homeowners say that student debt is delaying them from buying a home. Nearly 40 percent of 25- to 34-year-olds are not saving any money for a down payment. Millennials’ close social and familial bonds have also played a significant role. Young adults are now more likely to be living in their parents’ home than with a spouse in their own home than any time since the 1880s—that is, since we have data. (See: “Did You Know? Millennials Stay in the Nest.”)
So where does the housing market go from here? Older generations are buying home sales right now, but this trend has a shelf life. As massive Boomer cohorts continue to age out of their working years, their homebuying activity will taper. Xers who are thinner both in number and purchasing power will continue to replace Boomers in pre-retirement age brackets.
Millennials can be counted on to sustain the younger end of the housing market over the next five years or so just by dint of their sheer numbers. The hefty Millennial 1990-1991 birth cohorts will begin hitting age 32 (the median age of a first-time homebuyer) in 2022. If the young-adult homeownership rate were to rebound strongly just as this demographic wave hits, housing could enjoy a sizable boom. If on the other hand, Millennials continue to avoid both household formation and homeownership, the housing outlook will be lackluster. Keep in mind that we’ve already seen a large increase in the size of first-wave Millennial cohorts (age 31-35) without any demonstrable impact on housing demand. Also, keep in mind that the 1990-91 birth-year peak will be brief.
Further into the future? After 2025, most first-time buyers will be late-wave Millennials, on the steep downside of the demographic wave. Around the same time, a rising number of Boomers will be downsizing for good, opening up a growing supply of well-used McMansions. By then, the population tailwind will turn into a headwind.
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