A previous post, “For Millennials, Low Ownership Rates Weigh on Household Formation,” showed a lack of participation in the housing market among young adults in the Millennial generation. As a percentage of the population, Generation Y isn’t renting more than young adults in the previous generation. Instead, they are buying fewer homes. The reason for the drop-off in home buying rates is due to a mix of factors. This post explores some of the economic reasons.
The recent proposal of regulatory changes aimed at unlocking tight credit has led some to wonder if the result will unleash a flood of Millennial homebuyers. However, there are some significant economic headwinds that will likely persist in preventing those of Gen Y from purchasing a home.
In this post-recession world, qualifying for a home loan is more difficult. Home purchase generally requires a credit score, household income and a down payment sufficient to qualify for available or desired homes for sale. Such requirements set a high bar – one that many young adults are unlikely to be able to meet due to a confluence of economic and demographic factors that seem to stack the deck against young would-be homebuyers.
For starters, income levels for those between 25 and 34 are down. Median household income for that demographic has declined between roughly 5% and 15% in real terms from 2000 to 2012 for every education level of the head of household, according to the National Center for Education Statistics. And in 2013, the real median net worth of households under 35 years old was just $10,400. That was approximately 32% below the level estimated in 2001, according to the Federal Reserve Survey of Consumer Finances.
The downward trends in income and net worth are a result of both increasing population and two of the slowest recoveries from recessions in the nation’s history. At the end of 2014, total nonfarm employment has increased only 5.3% (about 7 million jobs) from the peak seen in 2001, according the Bureau of Labor Statistics (BLS). Meanwhile, Census data show the U.S. population between 18 and 70 has increased over 15% (about 28 million people). Additionally, an estimated 24.5 million more people over the age of 55 were in the labor force in 2013 compared to 2000.
Abundant labor supply and limited demand cultivated a fiercely competitive labor market over the past decade, pushing many to further their education. That brings us to the most commonly cited economic constraint for Gen Y – student debt. Over the decade from 2002-2003 to 2012-2013, the number of full-time undergraduate students rose from 9.1 million to 11.6 million people, according to College Board. That increased demand enabled higher education institutions to raise tuition prices 51% past the rate of inflation in the past 10 years,. The BLS shows the increased costs being even steeper. Studies show the average borrower will graduate with almost $27,000 of debt, as many more people are graduating with much higher debt loads.
Compounding the effects of the highly competitive labor market, prices of necessities have increased quicker than the reported rate of the inflation. Food prices are about 8% higher—relative to the CPI – than in 2000. Costs for healthcare have increased over 31% over the reported rate of inflation.
Given that job growth has accelerated notably in 2014, with a much higher share being created in higher-paying sectors, these trends in income and net worth are bound to start improving to some degree. Though, considering that the appreciation of median home prices has vastly outpaced wage growth over the past decade, many in the Millennial generation will likely continue to find it more difficult to qualify for a mortgage than Generation X did 10 years ago. We will go more into depth on how the housing and lending markets have change and their effect on the trends in home ownership in our next blog post.
Credit: PMI