Millennials recast the American dream.

Author:England, Robert Stowe
Position:COVER REPORT: THE ORIGINATION BUSINESS
 
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Millennials are late to the homeownership party. Earlier generations bought their first home at younger ages than today's population under the age of 35. [paragraph] While millennials are also sometimes referred to as Generation Y, there is no official or widely accepted definition for either millennials or Gen Y. In fact, the definition of what is a millennial varies. [paragraph] Neil Howe and the late William Strauss are often credited with coining the term millennials to describe the age cohort born between 1982 and 2004, so named because it would be the first generation in American history to come of age or turn 18 after the advent of a new millennium. [paragraph] Last year the U.S. Census Bureau defined millennials as those born between 1982 and 2000 when it announced that the number of millennials (83.1 million) had surpassed the number of baby boomers (75.4 million) for the first time in 2014. (While this definition was used in one study, there is still no official U.S. Census Bureau definition for millennials, according to a spokesperson for the agency.)

Observers throughout the mortgage, real estate and homebuilding industries, along with demographers who have studied this generation, expect them to more fully embrace homeownership later in their lives.

"In terms of the desire to achieve homeownership, they are no different than any previous generation," says Douglas Duncan, chief economist at Fannie Mae.

Consistently, he notes, Fannie Mae monthly consumer surveys have found that more than 90 percent of millennials say they eventually want to own a home.

Survey data is "fairly consistent" on the widespread desire of millennials to become homeowners, including surveys of consumer preferences by the National Association of Home Builders (NAHB), Washington, D.C., according to Rob Dietz, NAHB chief economist.

"It suggests what while millennials are certainly renting in greater numbers now than prior generations at this age, they do have the same aspirations with respect to homeownership," says Dietz.

For millennials, it is all about delay.

"It appears that millennials are doing a lot of the traditional life milestones a little later in life, going to school a little bit longer, getting married a little bit later, having kids a little bit later, and then also buying a home a little bit later," Dietz says.

The key question is whether millennials will eventually become homeowners at rates closer to those of earlier generations--but just later in life.

If they fall short of prior generational ownership rates, as many expect, how high will millennial homeownership rates ultimately go? A lot hinges on the answer to that question.

Urban lifestyles

A significant share of the Millennial Generation--especially college graduates with higher starting salaries--prefer to live in urban environments in the central business district of many of the nation's largest cities.

Given the high cost of urban housing, this choice is more likely to favor renting over buying, according to Chris Sherry, president and chief executive officer of Madison, New Jersey-based Better Homes and Gardens Real Estate.

In the Big Apple, 70 percent of households rent while only 30 percent are owners, she points out.

The preference of many millennials for urban living has led to revitalization of the borough of Brooklyn in New York City, according to Sherry. "They've taken over old neighborhoods and completely changed the look and the feel of Brooklyn," she says.

Millennials are likely to wait longer to buy a home, according to Sherry, because they want to be sure they can afford a home before taking the plunge and be sure they've found the location to match their lifestyle and community preferences.

Sherry believes the cautious and conservative approach to home buying displayed by millennials is driven by the fact their outlook on life was shaped by a number of bad things when they were young--the terrorist attack on the World Trade Center in 2001, the 2008 financial crisis, the housing bust with mass foreclosures and a weak recovery that has so far provided incomes below that of prior generations.

Will a preference by some for urban lifestyles and conveniences, if sustained, ultimately reduce the level of homeownership achieved by this generation? Or will many of those living in cities, like generations before them, as time passes, also move to the suburbs to find affordable housing and more space for a family?

The answers will vary across the nation, as the suburban option may or may not be attractive in any given market.

Home builders, developers and investors in new-home construction are focused on understanding the future housing choices of millennials so they can make decisions about what to build and where to build.

More college degrees

In one respect, millennials have an advantage over prior generations--more of them have college degrees, especially women. According to an analysis by the Washington, D.C.-based Economic Policy Institute (EPI) of microdata from the U.S. Census Bureau's 2015 Current Population Survey, 37 percent of women aged 24 to 29 had earned a bachelor's or an advanced degree.

By comparison, 31 percent of men aged 24 to 29 had earned either a bachelor's or postgraduate degree. The EPI analysis is contained in a report titled The Class of 2015, by Alyssa Davis, Will Kimball and Elise Gould.

"That certainly suggests that they are going to have the capacity to become homeowners if they chose to," says Lynn Fisher, vice president of research and economics for the Mortgage Bankers Association (MBA).

Fisher and her MBA colleague Jamie Wood-well, vice president of commercial and multifamily real estate research, have published a report titled Housing Demand: Demographics and the Numbers Behind the Coming Multi-Million Increase in Households. Citing forecasts by the U.S. Census Bureau, Fisher and Woodwell point out that household formation is poised to expand dramatically by as many as 15.9 million households by 2024. There will be as many as 5.5 million more Hispanic households, 2.4 million black households, 3.4 million non-Hispanic white households and 1.8 million Asian households, according to U.S. Census Bureau projections.

"It's possible that with a more educated population we'll see demand for smaller homes, to the extent they have fewer kids, get married later and both parties are working professionals," says Fisher. That suggests a demand for smaller spaces and more services, she adds.

For college-educated, millennial-headed households, living in the cities will be important, according to Fisher. "Probably one of the things we need to work on and be thinking about is the building and financing of condominiums for some of these groups," says Fisher.

Ultimately, Fisher expects suburbs to play the dominant role. "I think there will be plenty of demand for the suburbs. As a nation, we are still growing more in the suburbs than in downtowns," says Fisher.

In the end, there will be demand for a lot more new housing units in cities, suburbs and rural areas.

"We still need to think about building housing for all types of people--both single-family and multifamily. We're going to need renter and owner-occupied suitable housing," Fisher says.

Many wealthy, college-educated millennials will continue to favor living in the city, according to Fisher.

Housing footprint

So far, the millennial housing footprint has been modest, according to federal housing data.

In the 2014 American Community Survey--the most recent--the U.S. Census Bureau found that those born between 1982 and 2000 made up 28 percent of the population that year. However, households headed by millennials represented only 17 percent of occupied housing units, including both renters and owners.

The millennial ownership footprint was even smaller. Only 8 percent of owner households were headed by millennials in 2014.

"As you can see from this data, there's still a long way to go--both for owned and rented properties--in terms of the millennial influence on the market," Fannie Mae's Duncan says.

As more millennials enter the job market, that surge in rental demand is likely to increase, according to NAHB's Dietz. "That's one of the reasons our multifamily apartment builders have been doing well over the last couple of years," he adds.

"Over the medium term, over the next few years, many of those renters will become homebuyers," Dietz says.

When young people become homeowners, most will buy existing homes, according to Dietz.

Historically, he notes, about 70 percent of single-family new construction has been for the move-up buyer, with only 30 percent for first-time buyers. "Right now it's running somewhat less than 20 percent," Dietz says.

In fact, while inventory of existing and new homes is low, at the same time demand from millennials is weak by historic standards, according to Ted Jones, chief economist at Stewart Title Guaranty Co., Houston.

"In many places we don't have effective demand from many of our millennials today," Jones says, noting that while broadly speaking on a national level, inventory and demand are weak, the balance between the two varies widely by location across the nation.

Jones cites a study by the personal finance website ValuePenguin, New York, which identifies the best cities for young families. ValuePenguin evaluated 156 cities and ranked them on such things as commute time, real estate taxes, crime, economic strength, income as a multiple of rent, outdoor activities, hospital rankings, school ratings and other factors.

ValuePenguin's top five cities with attributes that appeal to millennials are, in the order of their ranking, Austin, Texas; Houston; Raleigh, North Carolina; Des Moines, Iowa; and Dallas.

Biggest share of homebuyers

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