WALNUT CREEK, CA—The largest generation in the history of the United States is maturing into their prime home-buying years. But experts differ over whether the estimated 80 million Millennials will jump into the housing market the way generations before them have. With all the talk of a sharing economy, overwhelming student loan debt and the Millennials' new outlook on ownership, deep questions remain over whether this maturing generation will set off a mortgage boom in the next decade. Here are five reasons why I believe that Millennials will represent the largest influx of new homeowners the nation has ever seen over the next decade.
• A $30-Trillion Boomer-to-Millennial Wealth Transfer is in Progress. Millennials are constantly stereotyped as cash-strapped and unemployed. And while their unemployment rate did soar to 14% during the depths of the recession and the Wall Street Journal recently pegged Millennials' average net worth at $10,400, this is only temporary. Millennials are set to inherit an estimated $30 trillion from their parents—the cash-flush Baby Boomer generation. This wealth transfer will occur over the next 30 to 40 years, but for the older Millennials, who are the children of the older Boomers, that inheritance is already slowly trickling down, funding down payments for first-time home purchases and changing the economic fortunes of Millennials who now have both feet firmly planted in adulthood.
• Down Payment Requirements Are Shrinking. For those Millennials who are not inheriting a portion of that $30-trillion inheritance coming from Baby Boomers, the good news is that mortgages are still within reach. Fannie Mae and Freddie Mac have reduced the down payment requirements to as low as 3% for conforming loans. The Federal Housing Administration has also reduced mortgage insurance premiums. Combined, these two factors mean that more Millennials can qualify for a mortgage even if they are relatively cash poor.
• Household Formation is Back to Pre-Recession Levels. When a recession hits, a strange thing happens—couples put off getting married and having children, and adult children move back in with their parents. The number of households in the nation either shrinks or flatlines. The ripple effect of this decline can be felt in the housing market. During the nation's most recent recession, what economists call “household formation” dropped dramatically. But it has also rebounded dramatically, growing by over 1.6 million households year-over-year in 2014. With record low interest rates, these new households will fuel a boom in first-time home-buying. In short, new households lead to new home purchases.
• The 'Sharing Economy' Loses its Luster When You Are Married with Kids. The opportunities to live an ownership-free lifestyle where all the advantages of ownership are still at your fingertips without the costs has made the “sharing economy” a phenomenon. Millennials share rides instead of paying for a cab fare, subscribe to music services rather than buying albums and trade housing space rather than paying for hotel rooms. There has been some speculation that this “sharing economy” will extend to the housing market and that Millennials will shy away from purchasing homes in favor of renting. But once Millennials mature, marry and have children, the urge to own the space they live in, to put down roots and to build equity in their home will take over, and Millennials homeownership rates will rise.
• Wages Are Rebounding. After a disastrous several years for the job market, the outlook for employment is finely stable and positive. Millennials who weathered the recession and have come out the other side with a college degree are finding a strong job market and ample room for advancement. Wage growth has been slow but steady since 2006, registering 1.7% in 2014, but spiking higher in certain urban centers like San Diego (3.7%), San Francisco (3.6%) and Seattle (2.8%). This confidence in the job market is increasing confidence in the housing market as young homebuyers count on stable employment, wage increases and new job opportunities in a bullish job market.
When you hear experts say that Millennials will be scared away from the housing market because of the experiences of the deep housing recession, remember their parents, the anti-establishment '60s Baby Boomers who were tuning in and dropping out. They seemed the least likely generation to pile into the housing market. But they did, despite a deep 1970s recession and double-digit interest rates. Their children, the Millennials, have hit similar bumps in the road to home ownership. But they will soon represent the largest cohort of new homeowners the nation has ever seen.
Darius Mirshahzadeh is the president and co-founder of Endeavor America Loan Services, a The Money Source company that he co-founded with his brother Mike and Ali Vafai. Learn more at ealoans.com and themoneysource.com. The views expressed here are the author's own.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
