Publications

- April 1, 2017; Vol. 4, Number 4

Home in Their Range: Millennials indicate they are ready to chase the American Dream

by Chuck DiRocco

Despite continued interest in renting and the challenges many face in buying a first home, millennials are now making plans to chase the “American Dream” of homeownership. Among the young professional segment of the 2017 Real Confidence survey,  the majority intends to be single-family homeowners within the next five years. For homebuilders, this welcome news has been a long time coming. Having remained on the sidelines for years, millennials are now showing signs of putting down roots, coupling up and pondering parenthood — and their financial well-being.

According to the 2017 Real Confidence survey, young professionals had a 61.1 confidence level, based on a scale of 0 (no confidence) to 100 (absolute confidence), that they would buy a home within the next five years. Surprisingly, the majority (35.4 percent) selected within the absolute confidence range of 75 to 100, with 29.3 percent falling within the moderate confidence range of 50 to 75. Svenja Gudell, chief economist at Zillow, was not surprised by these results: “Many millennials find it to be the best investment they can make to buy a home.”

Many young prospective buyers cite crushing student loans and large credit card debt as impediments to saving for retirement or a down payment, but young professionals in the Real Confidence survey who anticipate purchasing a home within five years said they doubted they would need much help from friends or family. Only 1 percent said they would need more than 30 percent assistance, compared with 62 percent who anticipated they would need absolutely no help; 29 percent said they would need assistance with up to 10 percent, and 7 percent said they would need help with 20 percent to 30 percent of the financing.

Relatively confident about their employment prospects and wages, young professionals polled for the 2017 survey want what most buyers do as their first purchase: a single-family home (57 percent), followed by an apartment (16 percent), a condo (15 percent) and a townhome (12 percent).

While it is often believed that many younger generations seem to want to live in dense, urban locations, the Real Confidence young professionals seemed not as sure. When asked if their living area would be in an urbanized setting over a suburban location, respondents gave an average confidence score of 59.4. Contradictorily, 58 percent stated that walkability is more important to their lifestyle over public transportation, 42 percent. However, as suburb development features begin to replicate the urban lifestyle, a trend to more affordable suburban life might follow.

“First-timers are looking for high-end features and amenities in their starter homes,” said Scott Nagel, president of real estate operations at Redfin, a national real estate brokerage. “Millennials especially are looking for high-quality appliances and other finishes in exchange for giving up the flexibility that comes with renting.”

Millennials could face a tough market to find these features. In January 2016, the supply of homes for sale fell to a post-housing crisis low of a 6.8-month supply, up from a 6.5-month supply in January 2015, according to analytics firm CoreLogic.

Moody’s Analytics reported household formations would outpace housing starts through 2020, with 4.9 million homes added to inventory over the next four years — still nowhere near the 2003–2006 pre-recession addition of 6.3 million homes.

With low supply and increasing demand, home prices are rising more quickly than inflation. From the end of 2011 to December 2016, the Consumer Price Index rose 7 percent. During that time, median home prices jumped 41 percent, per the S&P/Case-Shiller home price index. For new homes, the numbers were similar, with average home prices rising 39 percent from the trough in 2011 through the end of 2016, according to the St. Louis Federal Reserve Bank. Expectations are that 2017 median prices will rise anywhere from 3.5 percent (Zillow) to 5.3 percent (Redfin), compared with 2016’s 2.1 percent inflation rate.

Such trends bode ill for millennials, who, as the youngest cohort of homebuyers, tend to buy the least expensive homes.

Another factor that plays into this concern is rising interest rates. Millennials disproportionately take out loans, according to the National Association of Realtors. In December 2015, the Federal Reserve nudged short-term interest rates higher. While this was only the second increase in a decade, the Fed predicts three more rate hikes this year. A $700,000 house would be a stretch at 3.5 percent interest, and a rate of 6 percent or 7 percent would make it a near impossibility.

While homeowners far outnumber renters, their majority is slipping — from 68 percent in 2003 to 62.5 percent in 2015, according to the U.S. Census. While Fed data shows homeownership is still a preferred investment, and many millennials still yearn for it, many are opting out.

But despite trends that may challenge homeownership, Zillow still sees a generation that has long been interested in a house purchase. The real estate website says that millennials are quite conservative in their expectations and are currently closer in alignment with their grandparents’ generation than their parents’ generation.

The fact that these 20- and 30-somethings, who came of age in a housing bubble and the worst economic downturn since the Great Depression, are still chasing the “American Dream” speaks to their resilience — and good prospects for the building industry.

Chuck DiRocco is director of research, valuation and advisory at Altus Group.

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