Millennial Homeownership Delayed, But Not Denied
As we navigate the unprecedented impact of COVID-19, home has taken on added significance and there are signs that homeownership remains one of the main tenants of the American Dream. After hitting a bottom in the second week of April, mortgage applications to purchase a home increased for nine consecutive weeks, even exceeding levels from a year ago for five straight weeks. Housing may be positioned to lead the recovery, a role it has traditionally played in previous downturns, with the exception of the Great Recession. In the recovery from the Great Recession, the homeownership rate hit a generational low of 63 percent in 2016, but it has been steadily rising since. A combination of demographic and economic factors has driven the steady rise since the low point and remain poised to fuel demand in the years ahead.
"Though the pandemic presents new challenges to achieving homeownership, millennial lifestyle decisions will continue to support potential homeownership demand in the years ahead, meaning millennials may be poised to fuel a 'roaring 20s' of homeownership demand."
The homeownership rate is influenced by underlying demographic and economic factors, as well as housing market conditions. Close examination of these underlying forces can provide a more in-depth understanding of the changes in the homeownership rate over time. Our annual Homeownership Progress Index (HPRI) accounts for the influence of critical lifestyle, societal and economic trends on the likelihood of owning a home. Understanding these factors and tracking how they change over time allows us to measure potential homeownership demand.
Homeownership Rate Continues to Trail Potential Demand
From 2004 through 2008, speculation and easy access to credit caused the actual homeownership rate to exceed potential homeownership demand by an average of 3 percent, peaking at 3.5 percentage points in 2005. The gap then decreased until 2012, which is the first time when potential homeownership demand as measured by the HPRI exceeded the actual homeownership rate. When the HPRI exceeds the actual homeownership rate, it indicates that potential demand for homeownership may be stifled by market forces. Today, the primary constraint on the actual homeownership rate is most likely historically low supply of homes for sale. The reverse indicates that the homeownership rate is above the levels supported by demographic and economic fundamentals and may be pushed higher by speculation or easy access to credit.
Since 2012, potential homeownership demand, based on the lifestyle, societal and economic factors tracked in our HPRI model, has exceeded the actual homeownership rate. Millennial household formation is a major demographic trend driving the increase in potential demand, but rising house-buying power driven by wage growth and persistently low mortgage rates have also helped boost potential demand. Between 2011 and 2018, the annual average of the 30-year, fixed-rate mortgage has been near or below 4.5 percent, significantly below the pre-2011 average of 8.9 percent. In 2019, mortgage rates unexpectedly fell after trending up through much of 2018, helping increase house-buying power and further elevating potential homeownership demand, which exceeded the actual homeownership rate by 3.6 percentage points.
Potential Demand Expected to Grow Despite Economic Downturn
Millennials are the largest generational group in the history of the U.S., and that’s not the only thing that differentiates them from their generational predecessors. Millennials are more diverse, more educated, and have historically chosen to delay critical lifestyle triggers to buying a first home, including getting married and having children, in favor of furthering their educations. However, according to a 2019 survey, 88 percent of millennials believe homeownership is important for personal success, and there are signs that millennials will continue to be a driving force in homeownership demand. It appears millennial homeownership has been delayed, not denied.
For example, in 2019, potential homeownership demand improved, mostly thanks to millennials, those between the ages of 22 and 38 (in 2019). Potential homeownership demand in 2019 increased by three percentage points for millennials, outpacing the gains of Generation X (1.7 percentage points) and Baby Boomers (0.8 percentage points). It’s clear that as millennials form households and begin to make lifestyle decisions, such as getting married and starting families, they are increasingly choosing homeownership over renting.
Despite the pandemic-driven economic downturn in 2020, millennials are still aging, in large numbers, into the key lifestyle decisions that increase the likelihood of homeownership. This year, the largest section of millennials will turn 30, entering their prime homeownership years. Though the pandemic presents new challenges to achieving homeownership, millennial lifestyle decisions will continue to support potential homeownership demand in the years ahead, meaning millennials may be poised to fuel a “roaring 20s” of homeownership demand.