Anticipating the entry of millennials into the housing market is a favorite guessing game among real estate professionals and economists.
For much of the past decade, economic stressors including student loan debt and a weak employment and wage environment have kept the oldest of the 79 million Americans born between 1985 and 2004 renting with roommates or, more famously, living in their parents’ homes.
The oldest millennials turn 30 this year, one year shy of what the National Association of Realtors says is the median age of a first-time homebuyer. According to the Bipartisan Policy Center, millennials have been dramatically slower to get married or have children before the age of 30 than previous generations. And there is some indication that deferred family formation is resulting in delayed homebuying.
Much of the debate about whether this trend will stick centers on whether the typical economic factors or lifestyle preferences will be the key drivers.
One crowd believes the unemployment and wage environments are improving, which will catalyze family formation and, in turn, lead to more demand for homeownership.
Another group holds fast to the belief that the values of millennials are fundamentally different than previous generations and that they will choose to remain unmarried (even if they become parents) and continue living in more communal settings where renting is a key option. This type of value system would make the mismatch between baby boomers wanting to sell and millennials not looking to buy permanent.
I think the economic argument is more persuasive. And a recent study by the National Association of Realtors suggests the tide is already turning: Millennials made up the largest share of recent homebuyers, at 32 percent, in 2014.
I also think there are two critical factors that will have a tremendous influence on how and when millennials enter the housing market: possibly rising interest rates and intergenerational wealth.
First, few people under 30 have made economic decisions in a rising interest-rate environment. The rate has pinned at or near zero since the onset of the global financial crisis in 2008, which means it’s effectively been zero for more than half a decade.
According to historical data, during the years of zero-rate policy, 30-year mortgage rates in Virginia have bounced between about 3.35 and 5 percent. This trend has begun to feel so normal that every observation stating the rates are at “historic lows” has lost its impact.
The Fed has now signaled the days of a zero-rate policy are numbered. The prospect of rising rates will introduce a different kind of pressure as millennials enter the housing market. Today’s homebuyers typically let rates float before they lock with their lenders; buyers in the future might find themselves racing an uptick in rates that could affect the affordability of their home.
The other economic data point I look to might check the rising interest rate environment a bit. Simply, the U.S. is on the cusp of one of the largest transfers of intergenerational wealth in history. According to the consulting firm Accenture, baby boomers will transfer some $30 trillion in wealth to younger generations over the next 25 years.
Anecdotally, I see this happening in the market. There are a lot of parents helping children with down payments already. I expect this to continue. Few things strengthen an offer like cash.
Many view the relationship between millennials and homeownership as an enigma and possibly an anomaly. I view it as a matter of time. Helping them understand choices in a rising interest rate environment and leveraging the intergenerational transfer of wealth will be major factors in maximizing their impact on the market.