By Christina Lavingia, Editor
"Millennial" is almost a buzzword now. Everyone wants to know what this generation is doing -- or take a shot at assuming. As Gen Y begins to age, it's natural to wonder how this generation's mindset will affect aspects of our economy, from the job force and investing to homeownership.
Many argue that homeownership will end with millennials. This generation witnessed firsthand the toll a collapsed housing market had on their parents' and grandparents' finances. Cautious, millennials are big savers who, unfortunately, also carry a lot of debt. However, it isn't a lack of interest in homeownership that will drive millennials away; rather, their financial circumstances will delay their entrance into the housing market -- and potentially drive down prices and mortgage rates for all.
The widely believed notion that "Young people just aren't very interested in buying a house. Instead, the story goes, they want to rent a cool apartment, live in a city, and walk to coffee shops. Forever." as summarized by Time magazine, just isn't true.
Millennials Are Still Interested in Homeownership
Debt, a prolonged weak job market and a tendency to marry later will likely work in tandem to delay homeownership for many millennials, but members of this generation are still very interested in becoming homeowners. A Zillow survey found that respondents ages 18 to 34 believe more strongly that owning a home is necessary to being a respected member of society, living a good life and obtaining the American dream than previous generations.
According to Gino Blefari, CEO of HSF Affiliates LLC, the operator of Berkshire Hathaway HomeServices, Prudential Real Estate and Real Living Estate franchise networks, there might be setbacks, but millennials will be an important segment of the real estate market in coming years:
"Millennials will impact the homeownership landscape," Blefari said. "There's no doubt first-time buyers were impacted by the tighter lending requirements in recent years, and as home prices continue to rebound, some of those first-time buyers who don't have the equity of another home to help with a down payment were squeezed out. However, this generation still very much believes in homeownership."
Debt is one factor that will delay homeownership for many millennials. The average student who graduated from college in 2013 with student loans walked away with $28,400 in debt, according to the Institute for College Access & Success' Project on Student Debt; and the story isn't much better for older millennials. A 2012 study by Young Invincibles found that then 30-year-olds who graduated in 2004, on average, were likely ineligible for a mortgage due to poor debt-to-income ratios. Even if this weren't a metric lenders used, student loan obligations are preventing many from building the savings needed for a home down payment.
In addition to the setback of debt, a poor job market robbed many older millennials from years of stable income and savings to purchase a home. Even though every job lost in the recession has been recovered, unemployment rates are still low for recent college graduates, hovering around 11 percent for 20- to 24-year-olds in November.
One of the basic prerequisites of getting married -- a steady income stream -- isn't a reality for many. Unemployment rates are healthier now for older millennials, 5.9 percent for those ages 25 to 34; however, lost earnings and a weak economy likely kept many back from where they expected to be financially by this age. These reasons, along with more women pursuing higher educations and advancement in the workplace, are delaying marriage and, subsequently, homeownership for many, as it isn't feasible for most to purchase a first home on just one income.
According to Jesse Gonzalez, president and broker of record for North Bay Capital, Inc., employment will have a big impact on homeownership for millennials.
"The employment market must improve for millennials in order for them to start purchasing on a greater scale than previously demonstrated," Gonzalez said. "What we see is an unwillingness to lock in to long-term financial commitments by millennials and that will mainly change when stable, predictable employment is widely available."
Millennials who are married with steady jobs actually defy the trend of low millennial homeownership rates. Zillow found that adults ages 22 to 34 are more eager than older generations to own a home and that married millennials with two incomes are actually slightly more likely to own homes than generations before them. In fact, The Atlantic found that members of Generation X, ages 35 to 44, are leaving the housing market at an even faster rate and are more responsible for an overall drop in homeownership than millennials are.
Keep reading: 6 Tips for Renters Saving for a House
Supply and Demand Will Play in Millennials' Favor
Assuming that millennials actually aren't interested in becoming homeowners, the sheer rule of supply and demand will necessitate that the housing market become more affordable -- and therefore desirable -- if millennials don't enter it.
If a large segment of the population begins settling down and having families while still renting, there will be a lack of demand in the housing market. This will cause home values to fall overall, which won't bode well for existing homeowners; however, it will place home affordability within reach for indebted millennials. Even if millennials preferred renting, if buyer demand is low enough, the cost to rent will outpace the cost to own, pushing many millennials to then enter the market.
What value does debt-to-income ratio hold as a metric if all applicants have a poor one? Even if debt is a major hindrance for millennials, it won't be as defining of a factor if those entering the market all share the same burden. A lack of applicants and an abundance of empty homes will likely drive down home loan rates, increasing the affordability of homeownership and affecting how lenders look at debt-to-income ratios, as a cheaper home necessitates less income to finance. Therefore, it's possible a lack of housing demand will force both property values and home loan rates to fall, attracting stragglers to buy homes and cease renting.
Mortgages are averaging 3.73% for 30-year fixed-rate loans as of January this year, but assuming that our rebounding economy launches us into another era of stability and abundance, we could see mortgage rates reach highs experienced in the 1990s, as much as 10%. A lack of demand could help negate a surge in rates, however, if enough millennials enter the market on schedule. Then again, inflation has to be accounted for when considering long-term home values, which easily could outpace increases in salary over time. Because the housing market is cyclical, fluctuating due to a number of factors that vary over time, even an absence of millennials for some time in the market won't mark the end of homeownership, as a number of considerations will likely pull them in eventually.
According to Chad Corbett, owner of Corbett Real Estate Advisors, human behavior is a better indicator of the future housing market than current speculation.
"Listening to what the media says about real estate today or this week or even this year and basing a decision or prediction on that is like watching a horse run the first two seconds of a race and then placing all future bets on that horse because he was out front for at least two seconds last week," Corbett said. "If you want to predict homeownership rates you need to understand the motivation of buyers. ... Most people, regardless of age, race, income level, etc., make the decision to purchase a home after they've reached one of life's milestones."
Photo credit: United Nations Development Programme in Europe and CIS