Big, diverse, and a little bit different, the Millennial generation is often cast as the solution to—or the cause of—many of America’s housing challenges. But Millennials probably aren’t as principal to understanding U.S. housing market conditions as the sheer amount of media coverage may lead us to believe.
The opportunities available to Gen Xers and Baby Boomers, and the decisions they make about where to live, are also key rungs in the housing market ladder. But there is a mystique about Millennials in the midst of sluggish economic conditions which, among other less fanciful reasons, makes them an important part of the conversation about the housing market recovery and the role of housing in people’s lives. But can we separate Millennial fact from myth? And are markets and policy set up to adequately meet Millennials’ housing needs?
Who Are Millennials?
There is no universal definition of the Millennial population, though researchers and commentators often refer to the population of people in their late teens to early 30s as Millennials. There are about 75 million people age 18 to 34, making up nearly a quarter of the overall population. Millennials make up a larger group of the population than Baby Boomers and they are more racially and ethnically diverse than older age cohorts.
This population of young adults has been graduating from school and entering the labor force (or not) in the sluggish recovery of the worst recession in 75 years. They face limited employment options, stagnant wages and high student debt.
They are also entering the stage of life when people typically start families and think about buying a home. But, they aren’t.
What Do We Hear About Millennials?
There are a lot of stereotypes about Millennials. They live with their parents, either in the basement or in their old bedrooms. Or they have set up house in trendy microunits, tiny apartments with bare-bones kitchens and shared sleeping and living space. They don’t want a car and they have adopted a “sharing economy” for everything from transportation to music to technology. And they are shunning the traditional paths of marriage, children, and homeownership.
Millennials are different, and they have different preferences for housing which should change the way communities plan for housing.
But are these stereotypes true?
What Is Likely Truer About Millennials?
Rather than radically different preferences, it is economic conditions that have shaped the household formation and housing choice of the Millennial population. Relatively poor labor market conditions, slow wage growth, and high student debt have led to delays in coupling up, marriage, and ultimately household formation and homeownership among this population.
As a result, the life cycle milestones that adults have traditionally passed through in their 20s and early 30s—moving out on their own, coupling up and marriage, children, and homeownership—are on Millennials’ paths, as well, just delayed. The average age of marriage and childbearing, for example, will be higher for Millennials, but it is likely that the rates of marriage will ultimately be similar for Millennials compared to Generation X. While they appreciate amenities of city life, at some point even this generation will feel the call of single-family living in the suburbs.
What Does That Mean for Homeownership?
As the economy improves and wages rise, the economic obstacles to household formation and homeownership will dissipate. Time is on their side. Millennials are poised to drive housing market activity in 2015. Will there be a sufficient supply of the right kind of housing for them? Will they be able to access the mortgage market?
On the supply questions, even as local housing markets across the country have rebounded, new residential construction remains below long-term averages. And in many regions, new construction has been dominated by multifamily rental housing that has been critical to meeting the needs of both renters by choice and renters by necessity. But the tide is turning and there will be a growing need for single-family homes for Millennial first-time homebuyers. It is time for the single-family side of the market to kick into gear—Millennials are ready.
Because of their lower labor force participation rates, lagged wage growth, and higher student debt, Millennials will have less money to spend on their first home. The FHA recently reduced the price of its mortgage insurance by 0.50 percent in order to make it easier for moderate-income households to achieve homeownership. On average, a homebuyer purchasing a home with an FHA loan could expect to save $900 per year. While a relatively small sum, it could make the difference for some Millennial households. Alternative models of homeownership—including inclusionary housing and shared equity models—could also be a boon to Millennials as they look to buy their first homes.
Homeownership is a critical way to accumulate wealth. As a result of extreme economic conditions, Millennials have had to delay milestones generally preceding homeownership. Now, as they are increasingly prepared to become homeowners, it is important that the supply and policies be in place so that they do not delay the wealth building associated with homeownership as well.
(Photo credit: Flickr user Text100, CC BY-NC-ND 2.0)