Young Adults Progressing Within Housing Market

Over the years, we have been keeping an eye on the so-called ‘millennial’ generation in the United States – Individuals who have a birth date between the 1981 and 2000, whom are now between the age of 16 and 35. Over time, we have gained more information as these individuals progress through school and start to make their way into careers. The oldest among this group are now well into their mid-thirties, and many are considering a home purchase..

In a recent study by Fannie Mae Economic & Strategic Research Housing Insights, cohort analysis is applied to the American Community Survey (ACS) to analyze young adult home ownership rate change for both age groups and birth cohorts  The study divides recent history into three distinct periods: 1) the end of the 2000s housing and economic expansion (2006-2008); 2) the housing market collapse (2008-2010 and 2010-2012); and 3) the early housing recovery (2012-2014).

For some time, buying a home has proved challenging if not impossible for young adults, and the housing crisis only made this worse. The homeownership rate for individuals between 25-34 years of age fell by 10% between the onset of the housing and economic expansion and the early housing recovery. As time has progressed, we have seen homeownership rates decline for young adults, but this type of analysis provides a limited view of what is happening. If we also consider birth cohorts (tracking people as they age and move into different age groups) in addition to age groups, we can learn more about how millennials have actually advanced in the housing market. When we look exclusively at age group comparisons, there is clearly a homeownership deficit when compared to previous generations. However, when cohort analysis is applied to the ACS data, we can see this trend reversing.

Using the Census Bureau’s American Community Survey (ACS) to assess both birth cohorts and age groups, we can more accurately track how the market has changed during the recovery period since the housing crisis. While traditional age group analysis shows that homeownership for young adults has continued to decline during the housing recovery period, cohort analysis actually suggests that young adults have made progress over the same time period. When compared to previous generations, young adults are now closing the homeownership gap and have managed to make gains during the early stages of the recovery

Because the ACS sample group was so large, we can use this information and make estimates for small population groups. For adults between 20-33 years (using age groups), declines are seen per capita when assessing the time period before the housing recovery – from 2012-2014. From 2006, declines occurred every two years, but started to rebound in 2012. This change was particularly significant for those between the ages of 24-29, yet still suggested no signs of growth for young adults when purely assessing age groups

Early Recovery Growth – Although a reduction in decline is a good sign, it doesn’t necessarily foreshadow future growth. A more accurate analysis can be attained when cohort analysis applied. For young adults, the Great Recession in the late 2000s hit hard and homeownership slowed significantly. By the beginning of the housing recovery in 2012, young adults managed to increase home ownership rates and bridge the gap with predecessors. In fact, the incremental homeownership rate for those between the ages of 28-29 and 30-31 doubled compared to the rate of predecessor cohorts at the time of the housing crisis. Compared to 2006-2008, the difference was even larger and really suggested that the true state of the market cannot be observed by purely evaluating different age groups over time

Difficulties – Currently, overall homeownership rates have been significantly reduced compared to the time period before the Great Recession. With that being said, the gap is now narrowing as conditions within the market continue to improve. When taking the cohort analysis approach, comparisons of gains in millennial homeownership rates can be seen from the beginning of the recovery to the present. By using traditional age group analysis, there is no way to see the millennial homeownership rebound.

Although there was a little doubt as to whether the recovery would hold for the oldest millennials, their homeownership gains have now surpassed those of their predecessors, suggesting a very real recovery. As this demand increases, so does the demand for affordable housing and properties specially-built for the needs of first time buyers. Additionally, demand will increase for specialized mortgage products and other services targeting young adults.

To some, the news of this growth will come as a surprise considering the homeownership entry barriers for young adults. First, while the unemployment figures did improve between 2012 and 2014, they were still remarkably high compared to pre-crisis data. Second, credit was scarce during the recovery period - especially for those looking to buy a home for the first time. Third, there was an increase in millennial aged immigration over this period.

What will happen down the road in the housing market remains to be seen. While employment has continued to rise, affordability issues remain for first time homebuyers - a shortage of housing supply and tighter credit markets. The millennial market is indeed underserved, but changes must occur within the housing market to address these entry barriers. Will the market respond?

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