The Biggest Homeownership Hurdles for Millennials
Millennials should be making a sizable stamp in homeownership, but they have been largely absent from the housing space. Why is it that the largest generation in U.S. history isn’t participating in real estate as heavily as its predecessors? There are many difficulties standing in their way, according to new research.
A recent report by the Urban Institute, “Millennial Homeownership: Why Is It So Low, and How Can We Increase It?” delves deeper into the generational home-buying gap to assess the factors that are holding millennials back from their homeownership goals. When looking at the 25-34 age group, millennials are behind Gen Xers and baby boomers in homeownership rates by 8-9 percentage points, according to the report. When comparing overall homeownership rates in 2015, millennials were behind baby boomers by 42.8 percent and Gen Xers by 28.2 percent.
While factors such as parental wealth and creditworthiness play a role, there are more overarching influences on the millennial homeownership rate. The biggest obstacles?
Settling down is being pushed further out. Millennials are delaying major life events such as marriage and childbearing. These milestones are typically associated with higher homeownership rates; in fact, the possibility of owning a home increases by 17.9 and 6.2 percentage points, respectively, for those who are married or have children.
According to the 2015 American Community Survey by the U.S. Census Bureau, 40 percent of millennials are married. This is 7.5 percent lower than the 2000 rate for similar age groups, and 13.8 percent lower than the 1990 rate. The average marriage age is being pushed out further out: Between 1990 and 2015, the proportion of 18- to 34-year-olds who never married increased by nearly 20 points to 53.9 percent. Many millennials are also waiting longer to have children. Between 1990 and 2015, the proportion of married households with children (with a household head age group of 18-34) decreased from 36.9 percent to 25.7 percent.
High student loan debt is tightening millennials’ wallets. When compared to preceding generations, millennials are more likely to pursue higher education. According to 2015 rates, 65.8 percent of millennial household heads received some level of college education, a 10.1 percentage point increase from 1990 and a 13.3 point increase from 2000.
However, rising education costs have far exceeded income increases, creating a debt challenge. An estimated 36 percent of millennials have student loan debt, compared to 18 percent of Gen Xers and 4.1 percent of baby boomers.
Data from the Federal Reserve Bank of New York show that a 25-year-old’s average education debt has increased from $4,516 in 2003 to $10,033 in 2015. These high levels of debt are proving to be homeownership barriers for millennials who are struggling to save for a down payment while paying off their loans. They also increase debt-to-income ratios, potentially making it more difficult for them to obtain a mortgage.
Exorbitant home values are pricing them out of homeownership. Members of the millennial generation, especially those with higher levels of education, typically flock to more populous locations, such as New York City and San Francisco, in search of high-skilled cities with employment opportunities and urban amenities. These areas tend to be more expensive, with low housing elasticity due to a shortage of new construction for starter homes, the report states.
Additionally, many millennials are rent-burdened, paying more than 30 percent of their income toward rent, leaving them less room in their budget to save for a down payment. According to research by the Pew Charitable Trust, the transition to homeownership is slower for rent-burdened individuals. The demand and pricing for rental housing dramatically increased after the financial crisis.
The racial divide remains a far-reaching challenge. Millennials are the most racially and ethnically diverse generation. The increasing share of minority members, and the added home-buying challenges they experience, is lowering millennial homeownership rates on average, cites the report. According to 2015 statistics, white households represent the highest share of homeowners, making up 39.6 percent of all households. Meanwhile, the Hispanic homeownership rate decreased to 24.6 in 2015, and the black homeownership rate has been in continuous decline since 2000, sitting at 13.4 percent in 2015. The Asian household rate has fluctuated, dropping between 1990 and 2000 from 30.6 to 26.6 percent, before increasing to 27.2 percent in 2015.
How can the industry overcome these challenges? According to the report, many potential homebuyers are not aware of down payment assistance, especially first-time buyers. The first step to correcting this problem? Increasing awareness of government-sponsored programs through financial education as part of a high school or college curriculum.
Additionally, the Urban Institutes proposes a streamlined and tech-centered mortgage application that shortens the process and more thoroughly assesses risk. The underwriting process should also be revised to include factors not typically within a credit score assessment, such as rental payment history, in order to assist consumers with low credit or a lack of credit history. Other proposed solutions take the form of revised student loan debt reporting, changes to land-use and zoning regulations, and reduced racial and ethnic disparities.
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