Will Millennials Ever Become A Generation Of Homeowners: BofA Has A Troubling Answer

America's biggest as of 2016 generation, the Millennials, has a heavy burden on its collective 150 million shoulders: its task is to not only step in as a buyer of stocks once the baby boomers begin selling in bulk, but to also provide the much needed support pillar for the recovery of the US housing market. In fact, there have been countless "bullish" housing market theories built upon the premise that sooner or later tens of millions of young American adults will emerge from their parents' basements, start a household, and buy a house.

So far that theory has not been validated. One simple reason is that Millennials simply can't afford to buy a house. As we reported last week, a study from Apartment List showed that nearly 70% of young American adults, those aged 18 to 34 years old, said they have saved less than $1,000 for a down payment. This is similar to what a recent GoBanking Survey found last year, according to which 72% of "young millennials"- those between 18 and 24 years old - had $1,000 in their savings accounts and 31% have $0; a sliver (8%) have over $10,000 saved. Of the "older millennials", those between 25 and 34, 67% had less than $1,000 in their savings accounts, 33% have nothing at all, and 15% had over $10,000.

So does that mean that Millennials can simply be written off as a potential generation of homeowners, and if so, what are the implications for the broader housing market?

That's the question BofA economist Michelle Meyer asked on Friday, although she phrased it in the proper context: "Is it [still] cool to buy a home."

To our surprise, Meyer found that while the homeownership rate among young adults has plunged to a record low, helping to explain the slow recovery in single family homebuilding, and confirming empirical observations that Millennials have largely been a 'renter' generation, by Bank of America's calculations, the Millennial generation can afford to buy a home - at least in terms of making the monthly payments. While we - and many others would dispute that - BofA does make some other interesting observations, namely that lifestyle changes, including delayed marriage and childrearing, have led to fewer homeowners and a tendency to live close to city centers. Well, if it's not money it's clearly something else. Let's dig in.

First, here is BofA on a rather trivial, if critical topic: "the importance of the youth"

In order to understand the future of the housing stock, it helps to get a grasp on the growth in population, which is a function of immigration and the rate of births/deaths. The Census Bureau is projecting population growth of 0.8% annually over the next decade and 0.7%, on average, through 2036, showing continued slowing from the 0.9% average last decade. Perhaps even more important, however, is the age composition, with a particular focus on young adults who are the drivers of household formation. There are currently 75 million individuals considered to be Millennials, making up the largest generation. The average age is 27.5, implying that there is a large cohort of young adults coming to age (Chart 1). In theory, this should underpin growth in homeownership. But, it is complicated - we have to understand the ability of Millennials to afford housing and the desire to become homeowners vs. renters.

Can they afford to buy?

The first question to ask is whether the younger generation can afford to buy a home. We turn to the National Association of Realtors (NAR) affordability index which is a ratio between median family income and the qualifying income for a mortgage as a function of median existing single-family home prices and mortgage rates. According to this measure, homeownership is still very affordable relative to history. What about for young adults? Following the NAR's methodology, we compute an affordability measure for the 25-34 year old age cohort using median household income data from the Census Bureau. Our computed index only goes to 2015 given data limitations, but we extrapolate forward (Chart 2). We find that housing is still affordable for young adults, although not to the extent it is for the overall population. The gap in affordability between the overall population and young adults has widened over the years. That said, the affordability index for young adults is still above the historical average for the aggregate, implying that housing is generally affordable.

So what seems to be the problem? One obstacle is being able to make the downpayment. The NAR measure assumes a 20% down payment, which is a high hurdle for young adults- remember that the bulk of the current 25-34 year old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile. Plugging in a lower down payment of 10% and the situation looks worse due to increased principal and interest payments. With a 10% downpayment, the index would be at 125.2 in 2015, which is 11% lower than the standard 25-34 year old index and 25% lower than the broad NAR index.

Another challenge is the ability to take on a mortgage loan given high student debt. According to the NY Fed's credit panel, total outstanding student debt has reached $1.3 trillion, a substantial increase from the $260bn level in 2004. According to the NAR's Generational Report, nearly 50% of homebuyers under the age of 36 noted that student debt delayed their home purchase, making it harder to afford the downpayment. And, of course, there is the challenge from tighter credit standards which has made it more difficult to achieve homeownership.

But do they want to buy?

Addressing whether Millennials can afford to buy is only one part of the story. We need to understand if they actually want to buy. The homeownership rate has tumbled at a faster rate for 25-34 year olds than for other generations which we do not think can be explained by affordability metrics (Chart 3). We think it also owes to lifestyle changes. Maybe there is something to the stories about Millennials preferring to spend money on avocado toast instead of their home?

The shopping cart of young adults

Using data from the Consumer Expenditure Survey, we can look at the evolution of the consumer basket over time for those aged 24-35 (Table 1). Relative to the peak of the housing bubble in 2004, there has been a decline in the share of dollars spent on owned shelter and an increase in spending on renting. It also seems that this age group is spending more on healthcare and household operations, which include services paid to keep their household running efficiently (think cleaning). This has come at the expense of spending on apparel, transportation and groceries. The young adult in 2004 has a difference shopping cart than one today.

The single life

The change in spending patterns could reflect the fact that young adults are not only less likely to be homeowners, but they are less likely to be married or even live independently. Instead, this age group is living with parents or other relatives more than in the past (Chart 4). This adjustment in living arrangements has been ongoing for years but the Great Recession seemed to have speed up the trend. Today only 55% of those aged 25-34 live with a spouse/partner compared to over 80% in 1967. Life events such as getting married or having children are typical triggers to buying a home. The longer this age group lives with parents or independently, the more homeownership will be delayed.

City slickers

We have also seen a shift toward urban centers and away from rural areas over the years. This goes hand-in-hand with a decline in homeownership for young adults. Interestingly the share of young adults living in the suburbs has been fairly steady at around 41% (Chart 5). Moreover, it appears that there is a flocking toward the major cities, specifically in the city centers which are close to transit, workplaces and restaurants. City centers typically have more rental properties than the suburbs. But we also see greater home sales close to city centers than in the past. According to BuildZoom, new home sales within 5 miles of the centers of the 10 most densely cities have exceeded 2000 levels but if you go another 10 miles out, sales are about 50% below 2000 levels.

There are both cyclical and secular forces behind the drop in the homeownership rate for young adults. While young adults can generally afford housing, there are other constraints including the ability to make a large enough downpayment and tighter credit standards. Lifestyle changes are partly to blame.

BofA' troubling conclusion: "These dynamics won't change in the medium-term which should translate to a lower equilibrium pace for single family housing starts."


canisdirus rf80412 Sun, 06/04/2017 - 22:26 Permalink

If they do this, the values will collapse and millennials will buy them.

The problem is affordability and realistic prices, not willingness to buy homes. Beyond that, homes that are affordable on their incomes put them well outside even the deep suburbs of metro areas when they can make those incomes.

Hence, they will either inherit or prices will collapse.

In reply to by rf80412

Sudden Debt slimycorporate… Mon, 06/05/2017 - 03:30 Permalink

:)and when they have a bit of money, they spend it all at once on a trip, cellphone.... They young kids don't even buy nice cars anymore. They spend all their money on knick knacks and they have no clue where they spend it on.As a young guy, I save 50% of my paycheck and partied with the other half.Now, they're broke the second week of the money after receiving their paycheck.No economical skills.

In reply to by slimycorporate…

29.5 hours Sun, 06/04/2017 - 18:40 Permalink

"There are currently 75 million individuals considered to be Millennials, making up the largest generation"Good to know how many people are getting specially and royally screwed. They will also be blamed for any crash or depression upcoming.

BarkingCat BrutusTheBomber Sun, 06/04/2017 - 21:53 Permalink

I agree with you.Also almost every negative character trait that the millennials have can be attributed to how their boomer parents raised them along with other boomer dominated institutions. What pisses me off is that I am being lumped into the boomer generation.No fucking way.Originally the boomer generation was described as those born between 1945 and 1956 (and sometimes 1959).Then some asshole decided to stretch it to 1964.That is idiotic. Someone born in 1964 or even  1960 has a hell of a lot more in common with someone from 1970 than 1945. 

In reply to by BrutusTheBomber

JustPrintMoreDuh Sun, 06/04/2017 - 18:41 Permalink

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.... I believe that banking institutions are more dangerous to our liberties than standing armies.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."  - Thomas Jefferson.

ipso_facto Sun, 06/04/2017 - 19:08 Permalink

C'mon, all those 'student loans' given to diversity types are toast.  As is the credit rating of said diversity types.  Then again when did diversity types ever have real credit ratings required to successfully pay a mortgage?

Spine of Ruprecht Sun, 06/04/2017 - 19:11 Permalink

Owning a home is pointless if you can't change the spark plug in your lawnmower or sharpen its blades.Patch the drywall?  Replace a toilet or a light switch?Ask a 30 year old kid what the difference is between a Volt? Amp? Ohm?Solder?  You mean "soldier" - ha ha geezer can't spell.....You wan't me to climb up that ladder?  All the way to the roof??!!!?No one trained me to use a power washer.........Does your air conditioner have a water problem too? Standing Pilot light?  Gas???That's been moldy like that for years........ 

canisdirus Spine of Ruprecht Tue, 06/20/2017 - 12:31 Permalink

All the kids I know well (~6-35 years old - some millennials, some Gen-Z) are very skilled with tools. Then again, they all either participate in a hobby that requires extensive electrical, electronic, mechanical, and electro-mechanical skills; or they work where I work in manufacturing or engineering. Where are you finding all these incompetent young people? I'd bet it's your imagination, not objective experience. This crap about everyone young being stupid or incompetent is so far from reality that it isn't even funny.

In reply to by Spine of Ruprecht

umdesch4 Altesh Mon, 06/05/2017 - 01:03 Permalink

But when will he or she find the time? I'm in my 40s, and I was lucky at one point a few years ago. I was able to stop working for about 10 months. So I did a bunch of landscaping on my property, built a new shed, renovated my kitchen, replaced a bunch of plumbing, fixed some bad wiring that the previous owners had left, etc.These days, I work crazy hours, have a long commute, and my weekends are about cleaning, laundry, mowing the lawn, trimming some section of the yard. General upkeep. I have no idea when I'd ever find the time to actually do any more renos, or fix anything serious. Hell, I didn't even really have time to write this comment, but I did anyway...

In reply to by Altesh

BrutusTheBomber Spine of Ruprecht Sun, 06/04/2017 - 21:23 Permalink

You're a fucking moron if you think all Millennials don't know this simple shit.I'm on my 2nd home, about to sell and buy my 3rd. I just rewired my kitchen and installed under counter lights. So fuck you.I was an electrician for 2 years though, from 20 to 22. I decided I didn't want to pull wire for the rest of my Life, so I got a good paying job and still do electrical for people I like. Fuck the boomers though.

In reply to by Spine of Ruprecht

bloofer BrutusTheBomber Mon, 06/05/2017 - 00:29 Permalink

My millennial daughter replaced all the plumbing in a small house. She and her husband rewired the house, and he added a subpanel to the breaker box. They've remodelled two rooms with new drywall, paint, and window trims--after first wiring in new outlets and a ceiling fan. They installed a composting toilet and a new demand water-heater--which involved re-routing the gas line. My daughter does all the repairs and maintenance on their three vehicles. She can replace a clutch, a serpentine belt, or a brake cylinder, and just about anything else.Although there are plenty of urban dumb-shit millennials, there are also plenty of smart, capable millennials out there.

In reply to by BrutusTheBomber

bloofer Spine of Ruprecht Mon, 06/05/2017 - 00:20 Permalink

Buying a home is the only way you learn all this.I was fearful of buying a home when I was young. What if the furnace went out in January? What if the mower wouldn't start? I didn't have the income to pay for a new furnace or buy a new lawnmower, or pay someone to fix it.When I finally did buy a home, I learned to fix stuff. I learned how to do my own plumbing, electrical and carpentry. There is really no other way to learn these skills than to take the plunge and figure it out as you go along.

In reply to by Spine of Ruprecht

CJgipper Sun, 06/04/2017 - 19:15 Permalink

Why aspire to own a home or career when you KNOW there's zero chance of making those dreams a reality? That's what's going on.  They know between student loans, unpaid interships, unpaid jobs, h1b visas, etc, they will NEVER have a shot at owning (ie, free and clear), so why get into that mess?

conraddobler Sun, 06/04/2017 - 19:17 Permalink

Human nature hasn't changed at all.Almost everything done in the past had it's reasons, some of them were shitty, some of them were wise, most made sense in some way simply because of human nature.If you don't buy a home, you are a landlords bitch and eventually you will get sick of being someone elses bitch or stay a bitch.It's really that simple.The math of it is very simple.You buy you build equity, you do better than if you rent, rent is for those who have more need for mobility than stability.Eventually you get older and friends neat shit they do wears thin and you figure out that it's just you at the reigns of life and you need to get some shit done before you die.Renting really sucks at helping you do this.That has not changed.

swmnguy conraddobler Sun, 06/04/2017 - 19:34 Permalink

That's all true.  Nothing new about any of this.  It's looking as my kids are going to do pretty much what I did.  Get out of school, spend a few years learning how to live like an adult, renting and working crummy jobs, hanging around with friends and seeing bands and figuring out how to pay bills and judge character and situations.  Maybe have what feels like a serious relationship that might last.By the late 20s have a serious relationship, a job with at least some promise, and less terror at bill-paying time.  By the early 30s be ready to get married, have a kid and buy a house and car that actually works, in no particular order.When I did it people called it "responsible" and "prudent."  But it didn't make the banks much money.  I suppose that explains the current trend toward disparaging the young, cautious adults as "snowflakes" who "can't and won't commit."  Look who's so willing to commit to them, employers?  Bankers?  I'd say these kids are being very prudent in response to the conditions they're facing.  They'll do fine.  We did. 

In reply to by conraddobler

conraddobler swmnguy Sun, 06/04/2017 - 22:26 Permalink

I have never been a millenial basher.I have been a parent to a bunch of millenials and yes they absolutely baffle me at times.  They get away with stuff I could of never gotten away with but they also get knocked on the head just like I did.  Watching them learn life lessons it's obvious this stuff is all the same as it ever was. The landscape changes but the timeless stuff doesn't.  Family is important because family watches out for family.They get that is not necessarily the case in the wide world out there.   My dad was the dumbest man on earth until I hit about 25 and he's gotten smarter every year since then :)

In reply to by swmnguy