Millennials and Gen Z Getting Priced Out of Real Estate

Price Appreciation

A Core Logic report published in 2019 showed a 3.6% annual increase and forecasted a 5.8% increase by August 2020 in national home prices. This year by September the national home price index increased 6.7% annually bucking seasonal trends to the highest increase since May 2014.

While current homeowners have been able to reap the rewards of increased equity in their homes, it is the older generations who are benefitting. Millennials are missing out on this wealth creation. Additionally, as wage growth stays stagnant, the effects of being left out will likely become a generational struggle in the coming decades if the low homeownership trend continues.

Barriers of Entry

For many young people, cities are often the most desirable place to live when starting their careers as jobs are more plentiful and many list walkability as the main factor when looking for a home, according to the 2019 Fannie Mae research survey. The problem with this desire is that cities are the most expensive markets in the country, making it almost impossible to be able to afford a home early on.

This combined with student loan debt a lot of Millennials have taken on makes it all the more difficult to be able to take on a mortgage. With the average student loan debt hitting a record $30,000 per graduate who took out loans as of 2019 according to US News, the continued increase of debt obligation pushes down the age that these people will be able to buy their first home. Furthermore what makes this debt such a hindrance to future financial prosperity is the high-interest rate associated with it. Many students will pay thousands in interest for having the loan over its lifetime, all money that could have been going to save for a down payment on a home.

The downpayment is the largest barrier to entry for younger generations. For many young people, a 20% down payment on the median home price as of September 2020 is $64,000 on a $320,000 home. That alone is a large sum of money, and only rises significantly when you go to California with the median home surpassing $700,000 as of August 2020 according to the Sacramento Bee, which would be a $140,000 down payment more than double the national median.

Demographic Shifts

Because of the high cost of housing in desirable states such as California, it has forced many younger people to rethink where they want to be and what makes the most economical sense. For many, those places that exist are outside of expensive states. The top states that Millennials are moving to are Texas, Washington, and Colorado, respectively, which have much lower housing prices and costs compared to California and New York. While this may not be the ideal place where these younger people want to live, it allows them the economic opportunity to get into the market and begin to build wealth through owning a home.

For those who refuse to leave the states they love, many are moving further and further out from the city center. Often called exurbs, these communities are on the fringe of metropolitan areas and offer more affordable housing, but longer commutes. While the pandemic has reduced the need to be close to an office, it has caused this trend to accelerate. This has allowed Millennials who often lived in city centers to purchase homes in the far-out regions with data from the WSJ showing a trend that 34% of Millennials made up new mortgages as of July 2020 up from 2019.

With Millennials being the largest generation currently in the United States, the power they wield in terms of real estate purchasing power is crucial to support and power the real estate market for the coming decade until the next largest generation — Generation Z — can step in and take over.