What Millennials learned from the housing bust, and why they won’t buy houses

Millennials are not climbing on the property ladder, upsetting everyone who depends on real estate transactions to make a living.


A common refrain among housing industry advocates is that Millennials are simply ignorant to the benefits of home ownership, and if they could only be “educated” properly, they would shun renting in favor of owner-occupied housing. Apparently, Millennials are ignorant to both the benefits of home ownership and the lending options available to them.

This is nonsense and wishful thinking.

To the chagrin of housing industry advocates, Millennials are well aware of the perils of home ownership, and the education propaganda spouted by the housing industry falls on deaf ears. Millennials learned from the housing bust — they learned house prices can go down significantly, potentially trapping them in their inadequate starter homes for a decade or more. As a result, they chose not to buy homes even when it’s a realistic option for them.


Why first-time home buyers are staying on the sidelines

Published: Jan 4, 2016 By Andrea Riquier

Claire Jeffers, a 30-year-old public relations professional in Portland, Maine, loves her job, her city, and the Munjoy Hill neighborhood where she lives with her boyfriend.

She loves living within blocks of restaurants like Blue Spoon and Lolita, and her location overlooking the 100-year old Portland Observatory. But she also loves her monthly rent, which is several hundred dollars below the local median. And she knows something — perhaps another job, or graduate school — might pull her away. Those considerations, she says, mean she views buying a home as something that just doesn’t add up.

I think it used to be a symbol of something, a long time ago,” she said. “I think that there’s a romantic notion of buying your own house and calling it your own and saying you own property. I think that’s almost antiquated at this point.

This is an attitude that frightens homebuilders. Millennials learned from the mistakes of previous generations that worshiped homeownership and relied completely on it for their retirement savings.


Some people (mostly those who depend on real estate sales) claim Millennials are irrational or ignorant for failing to buy homes. The fact is they are quite rational and acting in their own best interest.

That viewpoint has grown more common in recent years. First-timers long represented about 40% of all buyers, but that share has shrunk substantially since the recession. They made up just under 30% of the market in 2015, according to the National Association of realtors. That number fell quickly and steeply from historical levels since mid-2010, when tax breaks aimed at first-timers expired.


First-time homebuyer participation is at 25-year lows, and it shows no signs of reversing the trend.

First-time home buyers are staying away for a number of reasons, experts say, including rising home prices, high levels of debt, cultural changes that have younger Americans getting married and merging incomes later, and a general lack of information about, and enthusiasm for, the homebuying process.

High home prices are a direct result of reflating the housing bubble to bail out the banks. The dismal turnover rate and lack of first-time homebuyers is strong evidence that the increase in price had nothing to do with an increase in demand. Rising prices without increasing incomes or stellar job growth is a recipe for pricing out first-time homebuyers, which is what we are enduring today.

A trend toward decreased participation in the housing market by first-timers has broad economic implications, experts say. … For the housing market, meanwhile, first-timers represent fresh demand. Without them, current homeowners can’t sell homes and move up; without move-up transactions, many older people can’t sell and downsize as part of retirement.“In terms of the real-estate recovery, the missing link is first-time home buyers,” Chrane said.


Most first-time homebuyers don’t have 20% down for a house, particularly at today’s high prices, so most opt for a 3.5% down FHA mortgage or a 5% or 10% down conventional mortgage with private mortgage insurance. Over time, assuming they don’t refinance or add more debt with a HELOC, a homeowner will build equity by paying down an amortizing mortgage. With wage growth in the area, house prices will rise 3% or 4% per year, and presumably, the borrower will have a higher income as well. So after 5 to 7 years, a prudent homeowner will have sufficient equity to cover the closing costs of a sale and have 20% to put down for a move-up purchase.

The collective action of all homeowners who purchased at the same time provides the demand for a move-up market. The equity ported from a previous sale is used to bid up prices in the most desirable neighborhoods which is why markets like Newport Beach always trade at a healthy premium to rental parity. However, the current move-up market is broken because potential move-up buyers don’t have the equity to make the move.

There are a range of reasons younger would-be buyers might be shying away, from higher student debt burdens than earlier generations grappled with, to skepticism about real estate as a safe investment in the wake of the housing crisis. …

A real problem and a rational skepticism.


Perhaps the biggest reason first-time buyers are staying away is price. Consumers consistently say it’s one of their biggest concerns about homeownership, and surging prices in many markets are keeping first-time buyers from being able to compete for properties.

Resale prices in Los Angeles are 66% higher than they were just 3 years ago. Do you think that might price out a few entry-level buyers?


And with sky-high rents rising even faster than incomes, it’s becoming increasing difficult to save for a down payment, further weakening housing demand. Since renters put a large percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment. There is no magic bullet or simple solution to this problem.

Jeffers, a college-educated professional with a father who’s spent his career in the housing industry, has plenty of access to information about how to become a homeowner, but confesses there’s a lot she just doesn’t know. Still, right now her biggest issue isn’t lack of information — it’s lack of interest.

Buying a home for me is certainly not a priority in my adult life right now,” she said.

Millennials reject the outdated American Dream of home ownership. People over 40 can’t relate to the mindset of Millennials because when they entered the workforce, they had little or no student loan debt, a good job waiting for them, and affordable house prices. Millennials have none of those things.

Millennials are loaded with student loan debt, debt that provided them the opportunity to work at Starbucks.


Given the difficulties Millennials faced and the economic challenges of the time, at least they should expect favorable house prices to soften the burden, right?

Nope. Instead of finding a large number of affordable houses available to purchase, the value of every house on the market is artificially inflated to values so high that even if they didn’t have the onerous student loan debts, they couldn’t afford a house anyway — and if by some miracle they could afford the prices, the lack of inventory frustrates their every attempt to find something they want to live in.

Given that reality, is it surprising Millennials want to redefine the American Dream?


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