Home Prices, Income Pose Challenges to Millennial Homeownership

Without question, the Millennial generation wants to be a home-owning generation. In the face of formidable down payment obstacles, said Redfin, Seattle, some are taking two jobs to get there. But another report from Freddie Mac, McLean, Va., suggests that might not be enough.

A Redfin survey of 2,000 U.S. residents who planned to buy or sell a primary residence in the next 12 months, including more than 500 respondents ages 24-38 who said they planned to buy their first home in the coming year, found more than one-third planned to or already had a second job to save money for a home down payment.

Fifty percent of those surveyed cited having enough money for a down payment as their top concern about buying a home, followed by affording a home in their preferred location (45%) and rising home prices (41%).

Aside from the 69 percent who saved directly from paychecks, millennials used several tactics and sources to accumulate the money needed for a down payment on their first home. Thirty-six percent used earnings from a second job, 13 percent pulled money out of retirement funds early and 10 percent sold cryptocurrency. Some were lucky enough to have received a cash gift from their family (24%) or an inheritance (12%).

A breakdown by household income levels showed notable differences in how millennials achieved a down payment. Millennials in households earning more than $100,000 per year were less likely than those earning less to have saved directly from paychecks, with 60 percent of high-earners having done so, compared with 75 percent of those who earn less than $100,000. Millennial households earning more than $100,000 were more than three times more likely than their less-well-off peers to have sold cryptocurrency investments and twice as likely to have sold stock investments. They were also more likely to have received an inheritance or cash gift from family or to have dipped into their retirement savings.

“For millennials who have launched their careers while working to pay off student loans in the last decade, having enough to set aside toward a down payment would have been a significant accomplishment,” said Sheharyar Bokhari, senior economist with Redfin.The survey said to afford a mortgage, 65 percent of millennials who intend to buy their first home this year plan to take some action, aside from just paying from their regular paychecks:

–32% plan to pursue additional employment
–19% intend to rent out a room to someone they know
–15% say they will drive for a ride-sharing service
–14% plan to split ownership of the home with friends or roommates

The report can be accessed at https://www.redfin.com/blog/2018/06/redfin-survey-36-of-millennial-homebuyers-took-a-second-job-to-save-for-down-payment-10-sold-cryptocurrency.html.

However, Freddie Mac said the root problems go further, Its June Insight report said financial headwinds and societal shifts, such as declining marriage and fertility rates, have depressed homeownership levels among young adults, with the biggest barrier slowing young prospective buyers: housing costs rising faster than incomes.

The report said economic and demographic trends from 2000 to 2016 to identify the causes behind the eight percent decrease in the homeownership rate among young adults (under age 35) since the rate’s peak in 2004 found higher rents and home prices are the primary reason for the decline in young homeowners (49 percent), followed by lower marriage and fertility rates (22 percent), and a likely combination of student debt, a preference towards renting, borrowing constraints and other factors (13 percent). The younger, more racially diverse population (12 percent), and increased migration to more densely-populated metro areas, which tend to be more expensive (11 percent), have also suppressed homeownership.

“Historically low mortgage rates and increasingly favorable employment conditions should have generated a far greater number of home purchases by young adults, especially in the last five years,” said Freddie Mac Chief Economist Sam Khater. “Unfortunately, home-price and rent growth above incomes–driven primarily by a severe shortage of housing supply–have been too high of a hurdle for many would-be buyers to clear.”

At a time when rising home values continue to build housing wealth for most homeowners, Khater said these weaker affordability conditions “have led to a missed opportunity for the interested young buyers who are unfortunately priced out of the market.”

The report said the home price-to-income ratio has increased substantially since 2000, depressing homeownership. The ratio has grown more for young adults than the overall population, and even more so for young adults living in metro areas. Freddie Mac estimated nearly 700,000 young adults did not buy a home between 2000 and 2016 because of increases in inflation-adjusted home prices and rents.

Freddie Mac said homeownership rates for younger age groups fell steeply after the financial crisis, and this lag is likely to persist through 2025. The homeownership rate for young adults (ages 25-34 in 2016) is due to rise as they age, but that increase varies. By 2025 Freddie Mac projects under a baseline scenario, the homeownership rate of young adults rises to 58.1 percent. Under an optimistic scenario, the homeownership rate could rise as high as 60.0 percent. In a pessimistic scenario, the homeownership rate only increases to 55.9 percent.