The idea is that most people begin their homeownership journey with a starter home and make their way up to more expensive housing. But is that theory still valid — especially now during a pandemic?

The first rung on the housing ladder is a small starter home, and the last is a retirement bungalow or condo. In between, households may buy and sell several times. Still, as long as they stay on the housing ladder, homeownership has built the personal wealth of more American families than any other means.

The housing ladder made the American Dream come true for generations of immigrants. It anchored the post-war era of affluence that made America the envy of the world and sustained our housing economy through the challenging decades that followed. 

The Subprime Crash, Great Recession, Housing Bubble, Big Short, or whatever you want to call what happened in 2007, toppled the housing ladders of more than six million homeowners. It was a time of unregulated greed that led to the “pulse” loan. In other words, if you had a pulse, you could get a loan.

For the first time since the Great Depression, homes devalued at an alarming rate. Values fell so low and for so long that homeownership’s reputation as a risk-free investment disappeared. 

Year-over-year prices have risen for 100 straight months. The largest generation in history (the millennials) is so committed to homeownership that they have driven home values to record highs and created a four-year inventory shortage. Supplies of affordable homes that traditionally constitute the first step on the ladder for first-time buyers are in even worse shape.

In a perfect world, the housing ladder works well. A recent study by the Urban Institute found that “there is a $72,000 difference in the median housing wealth of those who bought their first home between ages 25 and 34 and those who waited until they were 35 to 44.”

The study also said that for those who wait until they’re 45 or older, “the median wealth is more than $100,000 lower.” Those who scooped up a house before the age of 25 got the largest return on their investment, or as the study put it, “the biggest bang for their housing buck.” In the real world, the housing ladder hasn’t been working so well lately.

COVID-19 is destroying the housing ladder for millennials

Millennials’ share of housing wealth is declining, not growing. Through the first quarter, millennials owned only 3.7 percent of the nation’s housing wealth, a decline from 7.5 percent four years ago.

Millennials and Generation Xers suffered more and suffered longer from the Great Recession than older workers. Not to mention, younger workers are more likely to suffer financially from COVID-19.

The pandemic is making it harder for millennials to keep their jobs. According to the 20th Annual Transamerica Retirement Survey of Workers, COVID-19 has negatively impacted the employment of more than half of millennials (59 percent) compared to 13 percent of baby boomers and Generation Xers.  

Short supplies and rising prices have helped to keep 19 million potential millennial homeowners in apartments as they try to save enough for down payments. 

A recent survey found that, at the beginning of the year, 11 percent of renters said they planned to buy a home in 2020. The survey indicated that, by May, the current economic uncertainty caused “43 percent of would-be home buyers to change plans.” Almost half of older millennials who planned to buy last year have now changed their plans, and nearly one out of four renters (24 percent) who were ready to buy a home last year now say they will never buy a home.

The aging of first-time buyers makes a considerable difference in the wealth that the homeownership ladder creates. The median age of first-time homebuyers is now 33, the oldest in records dating back to 1981.

The later in life that you buy, the less equity you will have after climbing the housing ladder. First-time buyers who are 35, when they become homeowners, can expect equity to reach an average of only $76,288 when they retire.

Perhaps the housing ladder isn’t permanently broken. A good case can be made that neither the Great Recession nor the COVID-19 pandemic were extraordinary events. The reforms put in place by the Dodd-Frank legislation will hopefully prevent a return of pulse loans.

When we recover from the pandemic and build enough houses to supply the millennial generation, the ladder will be back in business — until the next economic crisis.

Steve Cook is editor and co-publisher of Real Estate Economy Watch. Visit him on LinkedIn and Facebook.

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