Mortgage Matters: Millennials Could be Foregoing Equity Wealth

The authors found that buying at an early age gives those that do so “a big bang for their housing buck.” Individuals who made their first venture into homeownership between ages of 25 and 34 had median housing wealth…

By Jann Swanson

While reams of research have been done on why members of the Millennial generation are less likely to own a home compared to their baby boomer and Gen X elders at the same age, the Urban Institute (UI) notes that knowing the reasons doesn’t necessarily shed much light on the potential long-term implications of this behavior. Delaying homeownership, according to UI analysts Jung Hyun Choi and Laurie Goodman, may reduce the wealth the generations’ members will acquire over their lifetime.

Goodman and Choi used a data-set called the Panel Study of Income Dynamics (PSID) which has tracked individuals since 1968 to identify individuals who reached age 60 between 2003 and 2015 and gather information on their histories, including the age at which they bought their first homes.

The authors found that buying at an early age gives those that do so “a big bang for their housing buck.” Individuals who made their first venture into homeownership between ages of 25 and 34 had median housing wealth in their early 60s of $150,000 while those who waiting until they were 35 to 44 accumulated $72,000 less. Those who didn’t buy until their 45th birthday or later accumulated median wealth at least $100,000 less than those in the 25 to 34 age group.

The UI researchers conclude that the age at which persons buy their first home has a great deal to do with housing related wealth as they approach retirement. Thus, the Millennials’ delay could have long-term economic consequences for their future and for the nation’s economic well-being as they fail to build equity, the largest single source of personal wealth, at the same rate as previous generations.

The authors conclude that “While people make the choice to own or rent that suits them at a given point, maybe more young adults should take into account the long-term consequences of renting when homeownership is an option.”

2017 was Peak Year for Transaction Volume

By Neil Irwin

These should be happy times for the housing sector. The economy is booming, with more people working at higher pay, and with the sizable millennial generation reaching prime home buying age.

Instead, the housing market has gone soft, acting as a drag on the overall economy rather than as a force propelling it forward.

Sales of new single-family homes were down 22 percent in September from their recent high in November 2017, and existing home sales in September were down 10 percent. This tepid residential investment subtracted from G.D.P. growth in each of the first three quarters of 2018.

Home prices have not declined nationally, at least according to the most widely followed indexes. But their rate of increase has declined, and more and more home sellers are finding they must reduce asking prices to find a buyer.

Given how central housing is to the broader economy — it is the biggest driver of both wealth and indebtedness for most families, and its fluctuations have frequently been major factors in past booms and busts — this slump isn’t something to be taken lightly for anyone hoping the good times will last.

When you look closely at the data, it appears this paradox of a strong economy and a weak housing market is, at its core, an illustration of a fundamental rule in economics: If something can’t go on forever, it won’t.

Home prices in a given location are ultimately tethered to the incomes of the people who either live there or want to. But for much of the last six years, that relationship has come undone.

Nationally, personal income per capita has risen 25 percent since the end of 2011, while the S&P/Case-Shiller national home price index is up 48 percent (neither figure is adjusted for inflation).

Those rising home prices got help from years of very low mortgage rates, which put more expensive homes within reach for people at a given income level. Activity was also probably boosted by some bounce-back effect after the housing market crash of 2007-09, a result of pent-up demand for homes that were not bought while the market was collapsing.

There’s no doubt that demographics are favorable for housing demand. The peak birth year for millennials was 1990; it’s a group that is turning 28 this year and thus entering prime years for home buying. As it happens, 28 is exactly the median response in a Bankrate survey that asked adults for the ideal age to buy a home.

But that doesn’t matter if prices are out of reach relative to incomes. Moreover, lending standards have remained more rigorous than they were during the last housing boom, so it has been harder for people to stretch to buy a home. The inability of people to buy homes they can’t really afford is great news in terms of avoiding another crisis, but not so great for the near-term outlook for housing.

“I think income growth will help us get out of this period,” said Robert Dietz, the chief economist at the National Association of Home Builders. “We’re probably looking at a period where existing home sales volume is flat to declining, and it now looks like 2017 was the peak year for transaction volume.”

But in the meantime, it could be a soft few months or even years of standoffs between buyers and sellers, with the big question of which comes first: sellers who settle for less after recognizing that the price they thought they would get is beyond the reach of buyers, or incomes that catch up with a housing market that got a little ahead of itself.