Millennials’ Housing Market Challenges

Which cohort represents the largest share of first-time home buyers? Millennials unsurprisingly, but did you know they also account for the biggest share of all home buyers too?

This is an important secular trend and one that does not get enough attention as the cyclical factors currently impacting the housing market, such as rising interest rates. Both are important to understand given the recent lackluster housing data: new home sales fell to a nearly 2-year low last month, for example, while existing home sales dropped by the most in over two years.

Therefore, we pored through Zillow’s recent 2018 Consumer Housing Trends Report to get a better grasp on how millennials will shape the US housing market for years to come. We’ll include a link to the +150 page report at the end of this note, but here are our key takeaways:

  • Millennials are the biggest share of US home buyers and first-time buyers: Millennials (ages 24 to 38) make up 42% of US home buyers. Gen X (ages 39 to 53) accounts for 26% and baby boomers (ages 54 to 73) represent 24%; the balance includes Gen Z (18-23 years old) and the Silent Generation (+74). First-time buyers represent nearly half (46%) of buyers, with millennials making up 61% of that group; the typical age of a first-time buyer is 34 years old.
    Why this is important: Millennials “differ in significant ways from older generations in how they approach home buying and selling: their willingness to begin the processes alone, the types of homes they consider, the compromises or contingencies they’re willing to accept, the way they finance their home and their desire to be involved in each step along the way.”
  • Millennials put down less than older buyers: Over half (60%) of Millennials put down less than 20% for their down payment versus 48% of Gen X, 43% of Baby Boomers, and 38% of Silent Generation buyers. To stay within their budget they are also more likely to compromise on home size, a short commute, location or a house that needs work.
    Younger buyers are also most likely to finance their new home with a mortgage: 84% of millennials, 81% of Gen X, 67% of Boomers, and 42% of Silent Generation buyers. Even still, younger buyers “who obtain mortgages get a greater share of their down payment from family and friends than do older buyers with mortgages”. On average, “the share of their down payment that came from gifts or loans from family or friends is 20% for Millennials, 15% for Gen Xers, 8% for Baby Boomers and 3% for Silent Generation buyers.”
    Why this matters: Younger generations are “more likely to come in under budget” and “more likely to rely on family and friends for help cobbling together the funds to buy a home.” Over a third (36%) of Millennials also “say it’s extremely or very important that their home offers the opportunity to rent out a portion for rental income”, versus a much smaller portion of older generations. In other words, many millennials need extra financial help or sources of revenue to afford a home.
  • Younger generations show interest in buying a home, but it can take years: “Faced with a move, 46% of all renters who uprooted this year say they considered buying a home. The desire is especially noteworthy among younger generations: 52% of Millennials say they thought about buying a home during their last move, as did 49% of Generation Z.” That said, “rent affordability is worse today than it’s been historically, and it’s making it more difficult for younger generations to save enough for a down payment on a home.”
    Moreover, just “5% of homeowners plan to sell their home in the next year, and 63% have no plans to sell, which may be one of several reasons why there has been an inventory shortage at a time when a new crop of buyers — Millennials — has created new demand for homes.”
    What this means: Millennials represent the largest group of US home sellers, while baby boomers are staying put. There is also an inventory shortage amid higher construction costs, especially for entry-level homes, making affordability an even greater challenge for younger generations to contribute to household formation.

Bottom line, the housing market needs millennials to power future growth given that they account for the majority share of overall and first-time buyers. They face many challenges, however, including limited inventory and years of rising home prices with the backdrop of tepid wage growth and record student loan debt. The report notes that many first-time buyers, for example, come from rental homes and “may have thought about buying for years before taking the leap”. High rental costs have not helped that transition, and when they are ready they typically need help from family or friends.

Going forward, these housing market dynamics for millennials don’t point to a resurgence of growth for the overall market, and put the recent slowdown in a demographic context.


Interesting Image

Out-Think Other Investors.

Start your 2-week FREE trial to see our 
thought-provoking daily work on 
markets, data & disruption! 
By clicking submit, you agree that you have read and understand our Terms of Service, Subscription Agreement, and Privacy Policy, and hereby agree to be bound by them.