Chris Tomlinson | September 2019
Existing home prices are up, new construction costs are rising and inventory is shrinking, but the most significant long-term challenge to residential real estate will be the millennial generation’s lack of purchasing power.
Real estate agents face a generational challenge, with baby boomers reaching retirement age and a much smaller Generation X unable to buy all of the previous generation’s property. Millennials are the largest generation in U.S. history, but they entered the workforce during the Great Recession of 2008 and are poorer as a result.
The average millennial has 40 percent less wealth today than the average Gen Xer did in 2001 and 20 percent less than a Baby Boomer at the same age, according to the Federal Reserve. Experts predict millennials will be the first American generation to be poorer than their parents. Which prompts the question, what will happen to real estate over the next 20 years?
Millennials, those born between 1981 and 1996, were set back as soon as they sought a higher education. The Greatest Generation, which survived the Great Depression and fought World War II, made sure states financed public universities so baby boomers could graduate without debt.
Beginning in the 1980s, tax cuts became the order of the day, and state support for higher education dropped to record lows. Since 1990, average tuition at four-year public universities is up 309 percent.
While a quarter of Gen X borrowed money for school, half of millennials had to take much larger loans. U.S. student debt stands at $1.5 trillion, and defaults are growing, according to the Department of Education.
Many millennials also graduated high school and college into the worst economic downturn since the 1930s. Young people struggled to find jobs, and those that did were often underemployed and underpaid. Millennial men earn 10 percent less than baby boomers did at the same age, when adjusted for inflation, and millennial women make less than similarly aged Gen X women, according to the Fed’s research.
Millennial median income at the end 2018 was $69,000, which is slightly better in inflation-adjusted dollars than the $67,600 that 22 to 37 year olds earned in 2000, according to the Pew Research Center, a polling and data firm.
Millennial paychecks have about the same purchasing power as those of Americans living 40 years ago. But average housing prices are up 209 percent over the same period since 1999.
Part of the problem is higher rents as a percentage of millennial income, which slows savings rates. As the knowledge jobs they fill have concentrated in large cities, demand for housing has grown and made the places they work much less affordable.
With so little wealth, millennials own homes at a rate 8 percentage points below previous generations, according to the Urban Institute. High debt and costs combined with low earnings add up to little wealth. Financial institutions have denied 58 percent of millennials access to credit, according to data collected by Bankrate.com, compared to 35 percent of previous generations.
More than half of Gen X owned stocks when they were 35, according to polling by Gallup. Only 37 percent of 35 year olds owned equities last year. Distrust of the stock market also led most millennials to miss out on one of the fastest-growing stock markets in history.
This lack of wealth and credit spells trouble for the real estate industry. Millennials are beginning to avoid high-cost real estate, with annual growth for the nation’s largest 87 cities slipping to 0.69 percent in 2017-2018 from 1.21 percent in 2011-2012, according to the Brookings Institution, a Washington think tank.