But this increased demand from millennials in an era of remote work, coupled with a lumber shortage and the fact that contractors have been underbuilding over the past dozen years, has exacerbated a shrinking housing inventory, with record-high prices for remaining houses.
As bidding wars rife with all-cash offers and higher down payments heat up the market, many millennials face the second housing crisis of their adulthoods.
There have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s, Daryl Fairweather, chief economist at Redfin, previously told Insider. Data from Freddie Mac shows that the housing shortfall has led to a decline in entry-level homes – the ones most affordable for millennials.
Freddie Mac defines an entry-level home as one under 1,400 square feet. Its data reveals that the current supply sits at a 50-year low. In the late 1970s, about 418,000 entry-level homes were built on average per year. In 2020, only 65,000 entry-level homes were built, even though 2.38 million first-time homebuyers purchased a home that year.
“There just aren’t enough of these homes to fulfill the demand,” Ed Pinto, director of the American Enterprise Institute, recently told The Wall Street Journal. “It’s creating this ‘Great American Land Rush,’ as I call it. People are moving around and there’s tremendous demand, but the inventory is down.”
They were already contending with a dwindling starter home supply back then.
In 2018, starter homes represented just 20.9% of available housing inventory in the US, according to Trulia. And a Realtor.com report at the end of 2019 predicted that while low interest rates would make it easier for millennials to buy, a shortage of entry-level homes would prove to be a major obstacle, largely because newbuilds that year were mostly devoted to “upper-tier housing” that cost at least $500,000.
Now, the pandemic and its consequent recession have added fuel to the fire just as millennials were finally recovering from their accumulated economic woes. “Now that they have economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” Fairweather told Insider. “They’re already boxed out of the housing market.”
Are you a millennial feeling shut out of the housing market? Email this reporter at email@example.com.
… designed in partnership with luxury architecture firm Candelaria Design.
According to Habitat for Humanity, 3D printing could be an economical way to address said crisis.
“When we consider the housing issues facing Arizona, the need for affordable homeownership solutions becomes clear,” Jason Barlow, president and CEO of Habitat Central Arizona, said in the press release.
“If we can deliver decent, affordable, more energy-efficient homes at less cost, in less time and with less waste, we think that could be a real game-changer,” Barlow continued.
Homebuilding methods like 3D printing or prefabrication are increasingly being considered as feasible alternatives to “traditional” construction.
Using a 3D printer to create homes is often seen as a more efficient and sustainable alternative to traditional construction methods.
“In addition to affordable homes, the market increasingly demands innovative housing concepts,” Yasin Torunoglu, the housing and spatial development alderman at the municipality of Eindhoven, said in regards to a different 3D-printed home in the Netherlands.
In total, the home will sit at 2,433 square feet, but its living space will fall a bit shorter at 1,738 square feet.
All of this space will then accommodate three bedrooms and two bathrooms.
“Beyond our city borders, this project can serve as a model for other communities as we all work to meet the critical needs of families who truly are the faces of this growing housing affordability crisis,” Corey Woods, the mayor of Tempe, said in the press release.
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.”