Millennials Shaping the Housing Market…as Renters?

Collectively, Millennials represent a hugely important demographic for the Housing Market. Representing 95 million people ages 18-34 that have, historically, driven the first time-buyer landscape.

However, in the first quarter of 2014, homeownership for the Millennial demographic declined to 36.2 percent, down from 36.8 percent in 2013 and the lowest on record since the Housing Vacancy Survey began tracking homeownership by age in 1982.

This data is important for another huge housing demographic – the real estate investor.

So what’s behind the drop? What does this mean for the greater housing market and just how can investors’ cleanup going forward? Let’s start with the why and move to the how.

1. Stuck in the Nest (Household Formations)

You may be wondering what the heck are household formations? They are what they sound like actually.

Imagine an unemployed or underemployed college graduate living in their parents’ basement instead of renting or buying their own place. When a person establishes a residence, whether that’s an apartment or a house or another dwelling, that person is forming a household.

From 2007 through 2011, roughly 550,000 households formed each year in the United States, according to the U.S. Census Bureau. This number was the lowest level since records started being kept after World War II, and was 59 percent below the annual average of 1.35 million household formations from 2000 to 2006.

That is a significant amount of people who would have been in the housing market a decade ago, but are not now.

So what’s with the rise of the basement graduate? The causes are multi-faceted, but the theme is the same. They simply can’t afford anything else.

 2. The Ole’ Ball & Chain (Student Loan Debt)

 A topic of much conversation in Washington recently, overwhelming student loan debt loads are stunting Millennials ability to form a household and to buy.

 In addition to the obvious and visible effect laid on the housing market, the student loan debt dilemma causes other unintentional consequences. For one, it stifles entrepreneurship. Young Americans simply can’t absorb the financial risk associated with starting a new business or developing that game-breaking idea.

Not only is that problematic for Millennials, it’s problematic for all of America.

We need the job growth created when smart, enthusiastic graduates pursue those new ideas. We also need the tax revenue created when risk taking graduates are successful in turning their fresh ideas into a successful business.

 3. Seriously? This is the only job I can get? (Underemployment)

When you combine crushing student loan debt with the lack of quality jobs for newly minted graduates you get a recipe conducive to low household formations.

Take a look at the unemployment rate for recent college graduates.

Note that this chart maps the unemployed, the underemployment numbers are even more dramatic.

Saddled with student loan debt and working a job that is not befitting their education or skill-set – welcome to the Millennial generation.

4. Housing (un)Affordability

It is safe to state that Millennials got their fill of suburbia during their formative years and want little, if anything, to do with the suburban dream their parents so eagerly sought.

The Millennials want to live in the city. They want quality public transportation; they want walkable neighborhoods, short commutes and plenty of cultural distractions.

In fact, it seems like their parents – the Baby Boomers – might have also had enough of suburbia, the long commutes and the excess maintenance needed to make sure their huge home is at least as nice as the Joneses have taken their toll.

Those that have displaced their children from the nest soon realize they do not need 3000 square feet. They too are headed inward, away from suburbia in increasingly significant numbers.

Those that still have junior in the basement are unfortunately welded to suburbia for the time being.

Together, the Baby Boomers and the Millennials represent more than 50% of the US population. Thus the importance of these numbers for another real estate demographic – the real estate investor.

Investors should be frothing at the mouth when they see these data trends. An entire demographic prefers to rent. That is opportunity knocking.

However, the real estate investing paradigm has shifted. Only invest locally served investors well for decades, but times inevitably change.

Millennials have mobility. They are not tied down by a mortgage, they are chasing the jobs, and investors should be too.

The jobs are growing the fastest in the places we described earlier – transit oriented, walkable, urban neighborhoods that are studded with tech jobs.  Hotspots like Austin, Naples, San Jose and Dallas are all leading the pack in both metrics – job growth and home value appreciation. Other markets, most notably Raleigh-Durham, Denver and Seattle, are all providing strong job numbers with lagging real estate metrics. Those spots represent some of the opportunity available.

Not surprisingly, California’s Silicon Valley hub – San Jose – presents one of the best representations of job growth leading to home value appreciation. Gaining jobs at more than a 4.1% clip and seeing home appreciation near 11.3%. Both are significantly higher than national averages.

It is also not surprising to see condominiums performing well in nearly every market. They all meet the criteria discussed above and all are hotbeds for millennial job growth, especially in the tech sector.

Real estate investors who choose the right combination of job growth and property will reap the rewards quicker and more easily than the investors still abiding by the “invest local” mantra.

This advice does not come without a word of caution though. The reasons why the “invest local” mantra became such sound advice still exist, in a somewhat diminished state due to the freedom of information from the internet, and should be heeded.

Geographically mobile investors need to focus carefully on selecting local real estate and mortgage professionals in the markets they are looking to invest. This decision is as vital to success as market selection itself.

Regardless, it will be interesting to see the housing market play out over the next few years as Washington looks to address the student loan and job growth issues.

The reforms in Washington could result in a Millennial flight from the proverbial nest. The era of the basement graduate may be coming to an end and only one thing is guaranteed, they will need some place to live.

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