The voices of Urban Institute's researchers and staff
August 8, 2018

What’s preventing millennials from buying homes?

Our new research found that the millennial homeownership rate was 37 percent in 2015, 8 percentage points lower than the homeownership rate of Gen Xers and baby boomers at the same age. This translates into 3.4 million fewer homeowners among these 75 million young adults.

Demographics and lifestyle choices have contributed to the reduced homeownership rate, including delayed marriage and increased racial and ethnic diversity. But millennials, most of whom turned 25 after the housing crisis, have also contended with a different economic environment than previous generations.

Three external factors are keeping millennials from buying homes:

1. High rents

Paying high rents when you need to save for a down payment can make it hard to become a homeowner. The proportion of rent-burdened households—those that pay more than 30 percent of their income for rent—with heads ages 18 to 34 increased from 38.4 percent in 1990 to 49.0 percent in 2015.

Our analysis shows that a 1 percent increase in a household’s rent-to-income ratio decreases the likelihood of homeownership 0.07 percentage points after controlling for other factors that affect homeownership like age, race or ethnicity, education, and income. So if the share of household income used for rent increases from 30 to 50 percent, the likelihood of owning a home decreases about 12 percentage points.

Let’s take two 25-year-old millennials, Mike and Chris, who are the same race and ethnicity and have the same education and $60,000 annual income. Mike pays $1,500 a month in rent, and Chris pays $2,500. Based on this one factor, Mike is 12 percentage points more likely to be a homeowner than Chris.

Rents have increased more in cities with limited housing supply. Many of these cities also have more jobs and have drawn a greater share of millennials over the past decade.

2. Limited housing supply

As millennials reach homebuying age, there is growing concern about the low housing supply, especially for starter homes. Since the housing market crisis, the number of new housing starts has fallen significantly, from 2.0 million units in 2005 to 550,000 units in 2009.

Although the number has increased since 2010, the current number of new housing starts (about 1.2 million) is still below 1960s levels. The estimated difference between net new housing supply and net new household formation or demand in 2017 was almost 350,000 units.

The supply crunch has increased rents and housing prices. Our home price distribution analyses for four major cities reveal that there has been a shift in the distribution toward higher prices, with a smaller share of sales occurring at the lower end of the price spectrum, where millennials are most likely to buy.

distribution of home sales prices in San Francisco

3. Excessively tight credit standards

Stringent credit requirements have also made it hard for millennials to obtain mortgages. The overall credit score for mortgage holders has increased over the past 18 years. The median credit score rose from 695 in January 2000 to 738 in April 2018. The credit score of the bottom 10th percentile increased from 595 in January 2000 to 648 in April 2018.

Because younger adults, on average, have lower credit scores, this increase in credit scores at the lower end of the distribution particularly affects millennials. The median credit score among millennials is just 640, significantly below the median credit score of 738 for new mortgage originations. Even credit scores in the top 25th percentile among millennials are lower than the median credit score for new mortgage originations.

borrower fico score at origination

The loss of homeownership for millennials could have a significant, negative impact on this and future generations. Homeownership remains highly beneficial for most families, offering a stable place to live, a hedge against inflation, and a way to build wealth.

With increasing life expectancy and pensions a thing of the past, millennials will need to be even more financially prepared for retirement than previous generations. Getting a late start on building housing wealth will not help.

Our research also suggests that parents’ homeownership status and wealth significantly influences whether their children will be homeowners, which means that low millennial homeownership will likely have a multigenerational impact.

Boosting millennial homeownership requires a long-term, multifaceted effort that begins with an accurate understanding of the challenges this generation faces.

Photo by Hero Images/Getty Images.

 

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