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For Millennials, Low Ownership Rates Weigh on Household Formation

The Millennial generation is frequently a topic of discussion in the real estate industry along with almost every other. While fascination in any cohort that is emerging into adulthood is a recurring theme in modern history, the immense size of the Millennial population has heightened anticipation of their entrance into the housing market. However, the first young adults in this generation haven’t participated in the housing market as much as other generations have during the same stage of life. This phenomenon has greatly shaped the housing landscape. But it has affected the rental market and ownership market differently.

At the root of the issue: Household formation among Generation Y is down. In order to form a household, a person, family or other group of people must occupy a rented or purchased dwelling. But the first young adults in the Millennial generation haven’t consumed housing units – therefore haven’t created households – at the same rate as young adults in the previous generation. In fact, the headship rate – the number of households as a percentage of the total population – among 20- to 34-year-olds in 2013 was down three points from 2000. Only 27.7% of 20- to 34-year-olds had formed households in 2013, compared to 30.7% in 2000, according to Census data.

So does the fall-off in household formation occur because fewer Millennials are renting, owning or both? Given the perception that Millennials are Generation Rent, the assumption would be that Millennials are Renting in Far Greater Numbers and purchasing homes in far fewer numbers. But that perception is based on a misleading comparison of renter households to the total number of households in Generation Y. The comparison is misleading because it ignores the sheer size of Generation, the largest in U.S. history. And population size plays the largest part of the housing question in the future.

 

As a percentage of population, there are roughly as many renter households in Generation Y as there were among young adults in 2000. Where the fall-off in household formation occurs is in home ownership. As percentage of population, there are far fewer owner households among young adults in 2013 than in 2000. Had the percentage held constant, there would have been roughly 1.2 million more owner households in 2013.

 

So why aren’t young adults buying homes? See our next post for the economic reasons that have limited the growth of Millennial home ownership.

Credit: Jay Parsons & the Good Guys at PMI