A record number of millennials wanted to buy homes in 2020, but the real estate market can’t keep up.
So finds financial services company First American, which measures potential homeownership demand based on lifestyle, societal, and economic factors in what it calls its Homeownership Progress Index (HPRI). When potential homeownership demand exceeds the actual homeownership rate, it signifies that external forces are suppressing housebuying.
Its new report reveals that potential homeownership demand has surpassed the homeownership rate since 2010, following the aftermath of the Great Recession. But the difference between the two hit an all-time high during the pandemic. Demand rose from 68.8% the year prior to 70.21% in 2020, while the national homeownership rate grew from 64.7% to 66.7%.
Contrary to the popular narrative that millennials can’t afford to a buy a house because they spend too much money on avocado toast, there are more millennials trying to become homeowners than there are houses available.
But as the generation became more financially stable with age, its potential homeownership demand has increased by 3.5 percentage points year-over-year, per First American. That’s more than any other generation. The majority of millennials turned 30 in 2020 and the oldest turn 40 this year, signifying they’ve reached the peak age for first-time homeownership.
“We’ve been underbuilding for years,” Gay Cororaton, the director of housing and commercial research for the National Association of Realtors (NAR), told Insider at the end of April. She said the US had been about 6.5 million homes short since 2000, then facing a two-month supply of homes that should look more like a six-month supply. Because of this, she added, homeownership is “going to be more difficult for millennials.”
Daryl Fairweather, the chief economist at Redfin, added that there have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s. She said it’s not enough homes for millennials, who are the biggest generation, to buy.
The imbalance has propelled housing costs to several record highs, resulting in bidding wars nearly everywhere nationwide, with competing bidders throwing down all-cash bids and higher down payments. It’s become millennials’ second housing crisis during their adulthoods.
Skyrocketing prices have pushed homeownership out of reach for many millennials, despite some of their peers leading the housing recovery. While the wealthier cohort of the millennials may be better positioned to buy a home, even those who successfully managed to scrape together some savings are facing dwindling chances of homeownership.
But millennials will be driving the housing market for years to come. As Odeta Kushi, deputy chief economist at First American, wrote in the report, “While millennial homeownership has been delayed relative to their generational predecessors, millennials now have the greatest influence on the housing market and remain poised to fuel a ‘roaring 20s’ of homeownership demand.”
Nearly two-thirds (64%) of millennials regret buying their home, a new Bankrate survey that polled 1,400-plus homeowners found. Just over 20% cited expensive maintenance costs as the reason why, while 13% said it’s because they overpaid.
Those reasons come as no surprise in today’s cutthroat housing market, marked by both a historic housing shortage and lumber shortage that have propelled housing costs to an all-time high. It’s resulted in heated bidding wars, where competing buyers are throwing down all-cash offers and offering higher down payments.
The skyrocketing prices and tight inventory is creating new affordability challenges for millennials, who have reached peak age for first-time homeownership. They led the housing market last year, but as the boom turned into an inventory crisis, homeownership fell out of reach for the generation yet again.
Many of those able to snag a house only did so by paying above market price, and some rushed the process in hopes of grabbing something before someone else did.
Consider Stella Guan, who told Insider’s Taylor Borden back in February that she regretted buying a home during the pandemic. Guan, who moved from New Jersey to Los Angeles, said she “wanted to get things done fast” and made seven or eight offers before one was finally accepted. Guan thought she landed her dream ranch-style home, saying she thought she got lucky since there was “somehow no counteroffer.”
But the home had black mold, and repairs cost way more than planned. She budgeted $30,000 to fix up the property but ended up paying upward of $50,000 to overhaul the house. While Guan planned to update the home to her tastes, she said: “I spent all my money on repair and not renovation.”
Unable to lure a new buyer, so she sold to an iBuyer and recouped only 50% of her money. She said the state of the housing market can push people into regrettable decisions.
Homeownership isn’t always as it seems
Guan isn’t the only one who found home improvement costly, per findings from BofA Research’s sixth annual millennial home improvement survey.
It found that millennials are more likely to buy a fixer-upper than a new home, and that some are using loans more frequently than cash to fund home improvement projects exceeding $10,000. When BofA last conducted the survey in 2017, only 34% were using loans for home improvement. Today, 42% of respondents are.
Other first-time homebuyers are increasingly making offers on houses they’ve shopped for online and through social media. While the move is second nature for a digitally savvy generation, it also proved to be an easier and less time consuming process for those buying a house in an area they’re not currently residing in and a way to move swiftly when houses are flying off the market. But some may be realizing their new house isn’t all it seemed to be behind the screen.
As Thao Le, a professor of housing economics and real-estate finance at Georgia State University, told Borden, “The trajectory of the pandemic, and thus the economy, is still very much unpredictable.” She added that before committing to homeownership, “aspiring buyers should evaluate their financial situation and job security carefully.”
Are you a millennial having a tough time buying a house right now? Email firstname.lastname@example.org with your story.
It’s bad news for many aspiring homebuyers – but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.
Daryl Fairweather, chief economist at Redfin, told Insider it’s unfortunate the generation that suffered from the last housing crisis – entering the job force in the middle of a recession – is now facing a different kind of housing crisis. “Now that they have [somewhat] economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”
The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic itself. It comes at a time when millennials have reached peak age for first-time homeownership, according to CoreLogic, leading the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.
While CoreLogic says millennials are set to drive the housing sector for a long time to come, they won’t have an easy time of it if skyrocketing prices and tight inventory create new affordability challenges. Just as homeownership fell within their grasp, it’s slipping out of their fingers yet again.
Chief among the latter has been the price of homes. By 2018, millennials buying their first home were paying 39% more than boomers did at the same age nearly 40 years ago. The increasing cost of a down payment made it even more difficult for millennials, already struggling to build wealth, to save.
Then came the 2020 housing boom.
Millennials led all generations in homebuying last year, according to Apartment List’s Homeownership report, accelerating a five-year trend in millennial homeownership rates rising the fastest. The millennial homeownership rate climbed to 47.9% from 40% just three years ago, per the report. The Jefferies note also highlighted that homeownership rates have increased among those ages 25 to 29 and especially accelerated for those ages 30 to 34. The same note also noted the underbuilding of homes dating back to the Great Recession.
“We’ve been underbuilding for years,” Gay Cororaton, director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US has been around 6.5 million homes short since 2000 and is currently facing a two-month supply of homes that should look more like a six-month supply.
There have been 20 times fewer homes built in the last decade than in any decade as far back as the 1960s, according to Fairweather. She added that’s not enough homes for millennials, who are the biggest generation, to buy.
The pandemic and a lumber shortage worsened the situation
Further driving the housing scarcity is the pandemic itself. Some owners aren’t listing their homes as a safety precaution, Cororaton said. Others are wary of putting them on the market for fear of being unable to find an affordable replacement to buy.
Cororaton said there might have been more homes on the market absent a historic lumber shortage. Lumber factories shut down almost immediately last March due to safety restrictions. When the housing market opened up, Americans bought more new houses than the lumber industry could keep up with. As demand spiked, lumber prices jumped by almost 200% since April 2020. It led to an average unexpected price increase of $24,000 for new homes in the past year, per NAR, one aspect of a nationwide record-high rise in housing prices.
Home prices have been shooting up for years, at a steeper rate than they did ahead of the Great Recession. But the national median home-sale price hit a new high of $353,000, per Redfin. Housing prices are up 18% year-over-year, Fairweather said: “I don’t see values going down at any point.”
The shrinking housing inventory further inflamed a market already hot with demand, sparking cutthroat competition. The typical house is getting snatched up in less than a month as aspiring homebuyers find themselves in bidding wars, putting in all-cash offers, and offering higher down payments.
Cash sales have increased from 18% to 23% in the past year, and first-time home buyers are more likely to put down a full 20% down payment than they were last year, according to NAR. “Because the market is so tight, you want to sweep in and make your offer more attractive,” Cororaton said, adding that a 20% down payment is more appealing to the seller because it signifies financial capability.
Every home sold in March saw nearly five offers on average, compared to two offers in 2019 and 2020 at the same time. Seeing some houses with multiple offers, some buyers on tight budgets aren’t even bothering to jump into the bidding war.
Losing an avenue for building wealth
A heated market running low on homes and high on competitive demand has ultimately set a new pricing precedent that is pushing homeownership further away for many first-time buyers. Although the wealthier cohort of the millennials may be better positioned to buy a home, even those who successfully managed to scrape together some savings are facing dwindling chances of homeownership.
Owning a home is a traditional way of building wealth through equity, but the increasing cost of such an investment is eliminating such an opportunity for many. This is particularly troubling for millennials, some of whom already have less wealth than past generations at their age. Losing housing as a wealth avenue could further widen the generational wealth gap between them and boomers, adding to the vicious cycle of millennial economic woes.
“The bottom line is, [homeownership is] going to be more difficult for millennials,” Cororaton said, adding that some of them are still dealing with debt.
Contractors need to ramp up new builds if they want to satisfy growing millennial demand, per Jefferies – as many as 1.7 million to 2 million new homes per year, maybe even more to fully repair the imbalance. Housing starts rose to 1.7 million in March, but Cororaton said building new homes is also the beginning of addressing the housing issue.
New-construction homes can be expensive for buyers. While an increase in supply would relieve pressure on prices, she said, down-payment assistance would be helpful. And when more homes are built, she added, we should allow for higher density housing, which would mean changing zoning laws and regulations. But as she put it, “that’s easier said than done.”
While builders are doing everything they can to build so they can take advantage of a hot housing market, Fairweather said, challenges like the lumber shortage, a lack of skilled labor, and shipping shortages – affects the appliances that going into a home – aren’t helping.
“All the shortages right now are definitely not helping us figure our way out of the hole, but even without those challenges, the hole is humongous,” Fairweather said. “So it’s going to take decades of building lots and lots of homes.”
For the last decade, as friends and relatives bought homes, my wife and I paid rent.
More specifically, we paid rent in New York City – which is to say we paid a lot of money in rent. So, so much. I try not to think about it, honestly.
We did it because we love living here, and Brooklyn is home. I considered it a necessary evil of living in the greatest city in the world.
But this January, just after the most uneventful New Year’s Eve in New York City history, we closed on a one bedroom Brooklyn co-op apartment. If you’d asked me in January 2020, “Will you ever buy a home in New York City?” the answer would’ve been simple: “No, not unless we win the lottery.”
Real estate prices in New York are notoriously high, of course, but that’s just one of several issues facing potential buyers. Not only is it expensive, but it’s extremely competitive. Before the pandemic hit, just going to see an available place in Brooklyn meant competing against people with, frankly, a lot more money than me. I am never going to outbid someone who makes $500,000 annually.
So, how did a couple of avocado toast-eating, cold brew-swilling, MacBook-using millennials manage to buy a home in Brooklyn?
It boils down to several key factors:
1. We are immensely lucky and privileged.
My wife and I graduated from college directly into the 2008/2009 subprime mortgage-spurred market collapse that led to a massive recession. Unlike so many of our peers, we were both tremendously lucky to get jobs directly out of college doing what we went to college to do: I am a journalist and my wife is an environmental scientist. I consider myself particularly lucky in this respect, as the media business isn’t known for its stability.
We are also both white Americans, which confers a variety of privileges throughout our lives. Literally everything was easier because of these factors, and must be acknowledged up front.
Because we were lucky enough to have steady employment for years after college, we had good credit scores from years of paying bills on time. That steady employment history coupled with good credit scores meant we were easily pre-qualified for home loans at low rates.
Notably, we don’t have kids, and we saved money steadily for several years before beginning this process.
2. The pandemic.
Above all else, the global pandemic was the most immediate reason we were able to buy an apartment.
If it weren’t for the coronavirus pandemic, the housing market wouldn’t have been in the gutter. If it weren’t for the coronavirus pandemic, we would’ve had to compete with crowds of interested buyers. If it weren’t for the coronavirus pandemic, mortgage rates would’ve priced us out of the market.
It’s horrifically sad that this is the case, but it’s very much the truth. We locked in a 30-year fixed-rate home loan at a 2.75% interest rate. That is a historically low rate, and enables us to afford the monthly payments. In fact, our monthly payment is just a touch higher than our last rent price.
Unlike rent, though, our mortgage price doesn’t increase over time. If we choose to move, we can sell the place and are likely to earn some money on the sale thanks to Brooklyn’s already rebounding real estate market. The benefits of homeownership over renting, at least in this respect, are so profound that they’re almost comical. In 10 years, when our mortgage is the same but average NYC rent prices have increased dramatically, we’ll really feel the difference.
3. Timing was critical.
In mid-August 2020, about five months into pandemic lockdowns, a really obnoxious piece was published in the New York Post where a former hedge fund manager Manhattanite declared New York City “dead forever” because he saw a video of Black Lives Matter protesters trying to break into his skyscraper. It was part of a gaggle of trend pieces that summer in which panicked rich people speculated that the pandemic would be the end of New York City.
That struck me as the perfect time to start looking for apartments: If the rich are fleeing, and the home loan rate is low, I figured, maybe there would be a chance for us.
It turns out that was more or less accurate: We only saw five, maybe six places, and we saw them at our leisure. Because of the pandemic, all showings were by appointment only, so there was no pressure to outbid other buyers on the spot.
Also because of the pandemic, a lot of people in our situation – married millennials in their mid-30s – were fleeing to the suburbs. It was as close as Brooklyn gets to a buyer’s market for a young-ish couple.
In the end, our offer was accepted for (slightly) below the listing price. For what we paid for a one bedroom apartment, we could own a pretty nice suburban home. But we don’t want a pretty nice suburban home, and we didn’t have to settle for one.
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Some millennials are finally making the leap into homeownership – and many are doing so without first seeing houses in person.
These first-time homebuyers are increasingly making offers on houses they’ve shopped for online, reported for The New York Times’s Debra Kamin. The trend is the result of a combination of factors, Kamin wrote: It’s socially distanced, an easier and less time consuming process for those buying a house in an area they’re not currently residing in, and a way to move swiftly in a cutthroat period when houses are flying off the market.
House hunting online is also second nature for a generation who grew up with the internet.
“Millennials are a more digitally savvy generation,” Sarah Pierce, head of operations at Better Mortgage, told Kamin. “When they come to us, they’ve looked on Zillow for a home, they’ve Googled mortgage rates. They’re not going down to their local mom-and-pop shop for a loan on Main Street.”
In a recent survey by Clever Real Estate, 44% of millennials said they would buy a home based on listing photos alone. And nearly 80% said they could be persuaded to buy a home sight unseen under certain conditions, like if it was a newly constructed home or if they had someone to look at the house on their behalf.
Both Zillow and Redfin told Kamin that they’ve seen traffic uptick exponentially to the 3D tours on their websites during the pandemic. Likewise, Rocket Mortgage, QuickenLoans, and loanDepot also told Kamin they’ve seen a surge in traffic as buyers turn to the internet to complete the homebuying process, from applying for loans to finalizing deals.
Millennials are also buying through Instagram
But millennials aren’t just taking to real estate and mortgage websites – they’re also house hunting on social media.
Millennials have been putting bids on fixer uppers featured in Instagram account Cheap Old Houses, which highlights historic homes that cost no more than $100,000 to buy, reported The New York Post’s Shayne Benowitz back in August. These “old houses” are typically found in smaller towns that have become enticing in the age of coronavirus and remote work.
A post shared by Cheap Old Houses ™ (@cheapoldhouses)
Finkelstein told Benowitz that the account helps make homeownership more attainable for millennials, many of whom have plenty of time on their hands during quarantine for restoration projects.
Millennials are driving the housing market
Online or not, millennials have been heating up the housing market.
More millennials bought homes last year than any other generation, according to Apartment List’s Homeownership report. The pandemic had accelerated a five-year trend in which millennial homeownership rates rose the fastest as the generation aged into the career advancement and prime homebuying stage of their 30s.
The millennial homeownership rate has climbed to 47.9% from 40% just three years ago, per the report. Families fleeing big cities for the suburbs and historically low interest rates, which made buying easier for those with enough money saved for a down payment, fueled the 2020 uptick.
As millennials turn their homebuying dreams into reality, they’re digitalizing house hunting in the process.
More millennials bought homes last year than any other generation, according to Apartment List’s Homeownership report, as the pandemic accelerated a five-year trend in which millennial homeownership rates rose the fastest as the generation aged into the career advancement and prime homebuying stage of their 30s.
The influx of millennial homebuyers was goosed by families fleeing big cities for the suburbs and historically low interest rates, making buying easier for those with enough money saved for a down payment. Finally, homeownership had become more attainable for a generation famously behind in homebuying compared to previous generations.
But the surge isn’t enough for millennials to close the homeownership gap.
Less than half (42%) of millennials are homeowners, per the report, compared to 48% of Gen Xers and 51% of baby boomers when they were the same age. While first-time home purchases increased from 31% to 33% in the past three years, the report said, the uptick doesn’t come close to the 50%-plus first-time buys during the pre-Great Recession “homeownership boom.”
The pandemic will likely continue to exacerbate this generational chasm, the report states, partly because it’s caused some millennials to delay homeownership or give up on homeownership entirely.
(The report looked at data from the US Census Bureau and the annual Apartment List Renter Survey, which polled 1,851 millennials.)
The millennial wealth gap makes it harder to close the generational wealth gap
Twenty-one percent of millennial survey respondents said the pandemic caused them to postpone buying a home. Of this cohort, 67% cited income loss and 21% said they had to dip into their down payment savings. And 18% of respondents plan to rent forever, with 74% of them citing affordability as the key reason.
The stark divide among millennials who find homeownership attainable and the peers who find it unattainable reflects the millennial wealth gap, in which one cohort of millennials is faring well and the other is struggling. As the pandemic intensifies this intragenerational gap, it’s become even harder for millennials to close the wealth divide that exists outside their generation.