Will Millennials start buying homes?

Perhaps the best reflection of the economic pressures Millennials face can be seen in the U.S. housing market. The pace of household formation and the rate at which Millennials head their own households is declining. In fact, detailed data show that the drop in homeownership during the financial crisis was the largest for people ages 25-29, falling by 21.8% to 32.7% in 2014, from 41.8% in 2006. By way of contrast, the overall drop for the U.S. was just 6.3%. A fair amount of this drop in homeownership could be attributed to foreclosures among Gen-Xers, who themselves were hit hard. However, people ages 25 and younger, largely Millennials, did see homeownership fall by 13% from 2006 to 2014. The sharpness of this decline is exaggerated somewhat by surging homeownership rates among people age 29 and younger during the precrisis housing boom. SPRS_No-homes-for-the-young_Twitter

The downward homeownership trend among Millennials has a number of explanations. Research shows the most common reasons renters cited for renting (rather than owning) a home are the lack of a down payment (45%) and failing to qualify for a mortgage (29%), according to a July 2014 study on the economic well-being of U.S. households by the Fed–while 10% of renters reported that they are looking to purchase a home. This suggests that a large number of renters would prefer to own a home if it were easier, or even possible, for them to do so. This is especially true among renters aged 18-29, who were far more likely than any other age group to indicate that they plan to move in the near future, with nearly half of them saying they can’t afford a down payment.

Millennials also faced tighter bank lending restrictions in the fallout from the financial crisis, keeping new credit and new opportunities even further at bay. About two-thirds of Americans aged 30 and younger have credit scores below 680 (on a scale of 300-850), which is much less common among older age groups (23). Since the financial crisis took hold, young people with student debt have seen their credit scores drop even further, relative to people at the same age with no student debt. Before 2009, people aged 25 with student debt generally had higher credit scores than people the same age without.

In light of these financial difficulties, it’s unsurprising that U.S. Census Bureau data shows that the number of 25- to 34-year-olds living in their parents’ homes jumped 17.5% from 2007-2010. This is similar to Pew Research, which found that 57% of 18- to 24-year-olds lived with their parents in 2012. By way of comparison, in 1960, three out of four women and two out of three men had finished school, left home, were financially independent, had married and had children by age 30.

Meanwhile, the number of 30-year-olds who own their own homes is now roughly equal to those who live with their parents–a sharp contrast to 2003, when a 30-year-old American was twice as likely to own a home as he or she was to live with parents, according to the New York Federal Reserve (24). There’s also a clear correlation between growth in student debt and the rate at which adult offspring live with their parents. For every $10,000 increase in a state’s student debt per graduate, there’s a corresponding 2.9 percentage-point rise in 25-year-olds living with parents (25).

All of this comes as the dollar amount of student loans outstanding in the U.S. has tripled in the past decade, reaching a record $1.2 trillion last year. (See “Growing U.S. Student Debt Could Have Long-Term Credit Implications,” published Aug. 26, 2014.) In fact, student debt was the only type of household borrowing that continued to grow during the recent recession and recovery. And while it’s difficult to draw conclusions about the specific effects this will have, it’s fairly clear that many young Americans are delaying purchases of suburban homes in favor of city rentals or had to move in with their folks, given that home ownership for those under 35 has fallen to about 36% today, from a high of 44% in 2004.

While homeownership rates were once traditionally higher among those with student debt than for those without it, that trend began to reverse during the recent recession. In 2008, homeownership rates were 4% higher for 30-year-olds with a history of student debt than for those without. While homeownership rates have fallen for both groups, the drop has been much steeper for those with a history of student loans: a 10% decline, compared with 5% for those with no history of student debt. For the first time in at least 10 years, 30-year-olds with no history of student loans are more likely to have mortgages than those with a history of student debt, according to the New York Fed (26).

In level terms, new entrants to the market cooled their purchases in January, accounting for 28% of purchases in the month–the lowest share they’ve claimed since June 2014 (also 28%). While January can be volatile because of seasonal conditions, that’s still significantly below the historical average of almost 40%. The slowly healing jobs market, coupled with more reasonable home-price appreciation trends and chances of higher interest rates, may mean first-time buyers could be about to enter the property market at greater rates.

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