Spring Mortgage Update: Have Millennials Caused a Surge in Home Prices?

Well, if they have, it’s not their fault. According to a New York Times article from March 28th of this year, mortgage rates have been on a steady incline since Q4 of 2017, and growth is expected to continue as we move further into spring. These fluctuations have vastly different impacts on different market sectors, and one group whose force is shaping the entry level housing market is the Millennial generation (born 1980-1998, approximately). Older Millennials are already in their 30s, with over half of them already past the age of 25 and all of them over the age of 18. They currently make up over half of the housing market. This week, we’re taking a look at how Millennials are shaping the housing market, what problems they face, and what measures are being taken by both the real estate industry and Millennials themselves to fix those issues.

Problems Facing Millennials Buying Homes

As it turns out, lack of home purchases among Millennials was not because they enjoy cramming five people in a three person apartment. On the contrary, those situations are indicative of a system in which housing prices are simply too high for people working entry-level positions. An article from Global News took a look at the average numbers of household income to debt ratios in 1992, 2007, and 2016 and found that while approximately 15% of an individual’s income needed to be put toward their total household debt, that number had jumped to 25% by 2016. Even though market rates were almost double what they are currently in 1992, the price of a starter home was substantially lower than it is now. Plus, the average student loan debt of an individual more than tripled while the average income refuses to keep pace.

Another reason Millennials see rising home rates as they attempt to buy starter homes is lack of movement from older generations. Stagnation took hold after the Great Recession as Baby Boomers and members of Gen X clung to their homes. Now, millions of those homeowners are comfortable in the homes they bought to raise their children, which means they are not downsizing or upgrading after the kids leave the nest. That stagnation clogs up the housing system since those homes, which would likely be sold to Millennial buyers, are staying off the market. So, now that Millennials make up the majority of home buyers on the market, there are more people wanting to buy homes than there are homes within their price range to buy. As this article from CNBC concluded, “[older homeowners are] not freeing up much-needed inventory.” Both of these factors compound in rising rates because the demand for starter homes is greater than the available supply.

What is Happening to Address the Housing Issue?

Home builders are flocking to the entry-level market, but not as quickly as the demand is growing. This article from Realtor Magazine notes that while many large builders are allocating funds to larger entry-level home construction projects, rising regulation costs make building starter homes a less lucrative business than it once was. CNBC also reported in this article that 13.8% young people are moving out of rentals and buying homes on average, 2.2% fewer than the average rate, and that this is likely due to lack of affordable options in the starter home market.

Solutions Millennials are Taking

There seem to be two main strategies to overcome the lack of starter homes in the housing market. First is a very traditional route, moving to the suburbs. Moving to the suburbs is a likely move for many Millennials looking for more space because zoning restrictions are not as tight or as costly as in the urban centers where many young people live. The second option is slightly less popular, but probably the more sustainable of the two: restoration. Home restoration is growing among Millennials who are attracted to the low initial costs and creative freedom these spaces afford. In fact, this article from Period Homes calls out Detroit, a city many picture as the once shiny but now crumbling Motor City of the movies, on the efforts of its residents for their commendable work in using restoration to revive the city. Reasons for these efforts range from a yearning to be in the heart of the city to high gas prices, but the magazine points out that the most important reason is most likely that “people, including those under 50-years old, like 50- to 150-year-old buildings.” Options like cash-out refinancing can help young people who want to creatively restore homes over time instead of buying brand new spaces.

For more information on the ever-changing mortgage market, follow our blog. If you’re looking to buy your first home or use cash-out refinancing to restore one you love, call Oceanside Mortgage today to assess your options!