Millennial Home Buyers Might Never Come Knocking

More than a decade has passed since the financial crisis hit, yet the housing market remains in a deep funk. Fear not: A wave of millennial buyers is about to hit the scene. Right?

One of the weirder things about the current economic recovery is how little housing has contributed to it. Unlike past expansions, which have tended to start with a flurry of home buying, the housing market remains deeply depressed. Last year, there were a combined 5.4 million new and existing homes sold. That was about even with 1998’s tally, when there were 50 million fewer people living in the U.S. The lasting slump is a reminder of just how severe the financial crisis was and how housing itself was at its epicenter.

But people have been talking for a while now about how millennials are going to reinvigorate the housing market, and so far they haven’t. The homeownership rate among households headed by someone under 35 was 35.4% as of the first quarter, according to the Census Bureau. In 1999 that level was about 40%.

A case can be made that the millennial wave has merely been delayed. The recession that ended in 2009 was unusually severe, and it hit millennials particularly hard, just as many of them were entering the workforce. The unemployment rate among workers aged 20 to 24 shot as high as 17% in 2010. It would have been even higher if more young people hadn’t opted to continue schooling instead of joining the labor force or simply stopped looking for work.

As a result of millennials’ delayed entry into the workforce, it is probably taking them longer to develop the financial wherewithal to buy a home. Many also are saddled with higher levels of student debt than previous generations, making mortgage approvals more daunting. Moreover, the tough labor market they faced early in their careers may have delayed other life events that often coincide with the decision to own a home. Compared with previous generations, for example, millennials have been getting married and having children later.

Some of the scars left by the financial crisis may never fully fade, though, limiting the number of millennials who achieve homeownership at any point in their lives. Take, for instance, the belief widely held until the bust that houses were a great investment because home prices never fall. Millennials learned during the crisis that this simply isn’t true. Like previous generations who came of age during hard economic times, they may be less willing to take on financial risks than people born in more prosperous periods.

Changes in the regulatory and financial environment have also made homeownership less enticing, according to Bank of America Merrill Lynch economist Michelle Meyer. Up until the crisis, government officials considered increased homeownership desirable, claiming it helped Americans accumulate wealth and build healthy communities. That notion has lost some currency, and the 2017 tax cuts actually reduced the financial incentives for homeownership. Furthermore, banks have become more risk-averse since the crisis. Many have become more eager to extend pricey mortgages to wealthier clients than to lend to those seeking smaller home loans, as do many first-time buyers.

A greater preference for urban living also could make millennials less likely to become homeowners than previous generations. Economists at JPMorgan point out that a greater share of millennials live in the central city of a metropolitan area with a population of at least 500,000 than did Generation X at the same age. Moreover, fewer urban millennials have decamped to the suburbs in their 30s than previous generations.

Home prices are, of course, substantially higher in many cities than in outlying areas, and while the higher incomes offered by urban jobs help mitigate that, for many city-dwelling people they remain out of reach. Only 33% of New York City homes are owner-occupied, for example, compared with 64% nationally.

It still seems likely that, as they age, many millennials will catch up with their predecessors and finally buy a place of their own. But when it comes to the housing market, the millennial buying wave may end up being little more than a ripple.