Do Millennials and Young Home Owners Face a Worse Real Estate Market than their Parents? Not one bit
Jordan Speaker l August 2, 2018
There has been significant writing challenges that millennials (birth year 1984 on) face entering the residential real estate market. Many of the documented challenges include low post college starting wages, underemployment, exponentially rising student levels, low inventory real estate markets, and large down payments required for starters homes.
Many members of previous generations reject this as millennial entitlement, and it made me curious (as a millennial) as to whether today’s generation is or is not facing a more challenging real estate market from previous generations.
To analyze this question, I utilized two customized ratios. The first is a ratio of total housing payments (principal, interest, insurance and property tax) to median wages, and the second is the number of years it would take to save for a traditional 20% down payment for a median home, based on median wages. Both sets of data utilize inflation adjusted indexes to normalize the comparison in real terms.
What are the results? The market is healthy but is getting expensive.
Real home prices are still 20% lower than during the 2005-2007 real estate run up
Rising interest rates will slow real estate transactions as current home owners see rapidly increasing payments for a trade up (monthly payments for median home are up 49% since 2012), and many will opt to stay in their current and often historically low mortgages (3-3.5% 30-year fixed products)
Student debt is a major drag on first time home buyers and suppresses current homeowners from trading up
Median home prices (real terms) have risen 45% more than wages (median real) since 1980
Housing payments are still historically cheap for those than can manage the down payment
Home buyers today still benefit form historically affordable housing, but they do face growing negative attributes. The market is still historically affordable for those that can manage a down payment. Given the widespread use of VA and FHA loans, many buyers are able to overcome the down payment challenge.
Student debt levels do pose a major challenge to first time home buyers and younger homeowners. As most young homeowners have typically attended college, and many carry substantial debt burdens that drag the time to save for a down payment for real estate.
The third major trend that has shaped the market since 1990 is increasing average square footage of homes. New home size construction has been a leading cause for higher median prices adjusted on a real basis. Sustained falling interest rates since the 1980’s are the major culprit as homeowners have effectively taken on larger homes as interest rates have fallen. For a rising interest rate environment large homes will likely become more difficult to sell as consumers will likely trend smaller based on $ per square footage comps.