Millennials May Be Forging Their Own Path to Homeownership
By Tim Ahern | August 9, 2016
Many in the financial services industry have been closely following the Millennials in anticipation of their entry into the housing market. These industry watchers may discern some interesting twists and turns in reports from Nielsen and the non-profit Demand Institute, which Nielsen co-founded with The Conference Board.
While recently presenting data on Millennials to an audience of Fannie Mae employees in Washington, DC, Angela Talton, Nielsen’s chief diversity officer, suggested that this new generation may be forging its own, largely untried path to homeownership.
Millennial Housing Demand on the Rise
Millennials have delayed homeownership, according to the Demand Institute’s 2015 American Community Survey. In 2014, 35 percent of 18 to 34 year olds were living with parents, compared to 25 percent in 2000. Twenty-seven percent were married, down from 40 percent in 2000.
But Millennial demand for housing is on the rise, according to Nielsen, and will soon account for a significant share of the housing market. The Demand Institute estimates that households headed by Millennials will increase 48 percent from 2015 to 2020 – from 26.6 million to 39.3 million, respectively.
“The influence of Millennials on the housing market will be significant over the next five years,” says Talton, “and there are a number of misperceptions about Millennials and their desire for homeownership. Millennials do want to own a home. In fact, our data suggest that their intentions and desires are not that different from those of previous generations. It’s their timing and approach that will differ most.”
Talton says that a majority of Millennials want to become homeowners. Seventy-five percent believe owning a home is an important long-term goal. And 80 percent view homeownership as an excellent investment.
She acknowledges that finances have been holding Millennials back from becoming homeowners. Sixty-two percent of Millennials who rent say they do not currently own a home for financial reasons – including lack of a down payment, income, or poor credit. Fifty-two percent of renters think it would be difficult to qualify for a mortgage. Research by Fannie Mae’s Economic and Strategic Research (ESR) group reached a similar conclusion about the financial constraints on owning a home.
The homeownership rate for this group has been on the decline – even for more affluent and married households, Demand Institute research shows. Since 2010, the rate has fallen 12 percent for 18 to 34 year olds with incomes of $75,000 and higher. It has dropped 8 percent for those who are married.
The financial challenges Millennials face are apparent from looking at changes in their median non-housing assets and debt. Assets declined from $8,100 in 2001 to $4,600 in 2013. Debt also declined, but not as substantially: from $8,700 to $7,000.
Talton concedes that it will take time for Millennials to get on track to buy a home. “When you get that first job, your assets are based on your starting point,” she says.
But Millennials are optimistic that they will be able to establish careers after a slow start in the labor market – and after working in lower-paying jobs than what they prepared for in school. Eighty percent say they expect to see their financial situation improve in the next few years.
In the meantime, Talton suggests that Millennials may be putting the time they are spending in their parental home to their financial advantage. They may have a stronger “desire to own a home than to rent because they are seeing investment in the property makes more sense,” she says. That may be why “they are building up income and savings to own instead of rent.”
When it comes to purchasing a home, “It seems as though Millennials are very focused on how to do it and how to do it the right way,” she says. “So even if it means I need to stay at home with parents longer, I’m going to build up my savings so I can afford the house once I move out and actually be able to sustain it.”
Talton observes that not only have more Millennials delayed leaving the roost, they are also staying with their parents longer. She sees this as equating to a decline in renting.
“Millennials are thinking through the process,” she explains, and may be skipping the traditional steps of first renting and then buying a first home.
Starting out in a first move-up home may be unconventional, but it makes sense when you consider the significant rise in the country’s multicultural households. More than in the general population, these households tend to include members of multiple generations. Challenging economic times also seem to have brought families closer together, where they are seeing some of the advantages – not just financial – of living in the same place.
More Space, Rather than Less
Demand Institute’s survey findings on space preferences suggest that multi-generational households are very much a factor. What Millennials desire in living space runs counter to what the media has described.
Having more space is a top priority for 18 to 34 year olds. Among survey participants, 65 percent said they want more space, 25 percent would be happy with the space they now have, and only 10 percent were willing to settle for less.
Intrigued by this research, Fannie Mae Chief Economist Doug Duncan agreed with Talton that “it’s not what we have been seeing in the press.”
Because Millennials have been slower than members of previous generations to establish households and start careers, many in the industry have assumed that they would have less income to spend on housing and would compromise by starting out with smaller homes, largely in the rental market.
But there are some logical reasons why Millennials may think otherwise. “They are wanting to bring the extended family along at some point and they understand that they will need that space,” says Talton.
“They are also wanting to create what they remember from their childhood,” she adds. And the homes of their parents were not “the 300-square-foot rental apartment you hear about in the media.”
And there’s the perspective of the parents. “We were surprised to see a lot of the parents are very comfortable with the Millennials living at home. Usually you call it the honey-do list, in this case you would call it the kid-do list. You have this built-in fixer upper, this cook, this person to chauffeur young siblings around. And aging parents might need help with the grandparents in the home,” she says.
Diversity Is Destiny
Key to understanding what drives Millennials is that “they are the most ethnically diverse generation to date,” notes Talton.
As of 2013, 42 percent of Millennials – or 20.9 million – were non-white, she says. That’s compared to 38 percent of the Generation X population and 24 percent of baby boomers.
Or as Nielsen likes to say, “American diversity is destiny.” It reports that 92 percent of the total growth in the U.S. population from 2000 to 2014 came from mixed races, Asian Americans, African Americans, and Hispanics.
The 25 most populated U.S. counties provide a foretaste of what to expect in the future: Multicultural people held the majority in 21 of them.
“The immense buying power of multicultural consumers continues to energize the U.S. economy,” notes Nielsen. “It is an opportunity you no longer can ignore.”
According to the University of Georgia’s Selig Center for Economic Growth, Hispanics will have purchasing power of $1.6 trillion by 2018, followed by $1.1 trillion for African Americans, and $713 billion by Asian Americans. Purchasing power for these groups has been moving up sharply.
Compared to previous generations, Talton says, Millennials spend much more time online researching products before they buy them, and seeing what people – and their friends – are saying about them. They also have a faster propensity to do new things online – such as shopping for groceries.
ESR has also studied how consumers are using technology in shopping for a mortgage and mobile opportunities for mortgage lenders. The group’s findings back up the assertion that consumers are confused by the mortgage process and terminology and are looking for answers from lenders, family, and friends.
ESR research has found a significant lack of understanding about minimum mortgage qualification criteria among consumers in general and, more importantly, among renters who plan to purchase a home within the next five years. However, consumers cite lenders as the most influential source of mortgage advice, suggesting the value of working closely with lenders to improve what consumers know about qualifying.
Talton suggested that Millennials will be more responsive to working with loan officers who are more like themselves.
“Who’s the person who’s introducing that Millennial to the mortgage? Who’s the person that’s talking to them? You want to make sure that the people are Millennials too. That they are able to understand the situation and talk to them on a personal level.”
Tim Ahern is a writer in Fannie Mae’s corporate communications department.