Millennials Should Be Cautious About Buying Homes

Recent trends in the housing market suggest that Millennials may be finally buying homes rather than renting. It’s good news that more young adults can become homeowners – but the states of both the mortgage and rental markets suggest that the time is not yet right for a Millennial buying spree.

The current turnaround in buying habits is on display in a November report from Fannie Mae, which contradicts conventional wisdom by showing a positive trend in young-adult home purchases that began at the end of the Great Recession. Yes, the overall proportion of adults under the age of 35 that own homes continues to decrease with each passing year. But when young homeownership is assessed based on age cohorts – rather than as a snapshot of the ownership rate among everyone aged 20 to 35 in a given year – a different picture emerges.

As the recovery has rolled on, young adults passing through any given age range – say, from 28 to 30 – have become increasingly likely to buy homes. The trend amounts to a definite upswing in the rate of home buying among Millennials, and the rate of homeownership for Millennials will soon move closer to that of past generations of young Americans.

The stabilizing of rental prices has begun in major cities across the country.

Predictably, the authors of the Fannie Mae study celebrated the trend. Years of lagging homeownership rates have led many commentators to speculate that Millennials might never buy homes at anywhere near the rates of their parents and grandparents.

Renting v Buying

It was less predictable, however, that apartment rentals would quickly become an affordable alternative to buying a home. The stabilizing of rental prices has begun in major cities across the country. Monthly rates are increasing slower than the national average in Chicago, Atlanta, Houston, Boston, Philadelphia, Miami, Washington, D.C., San Francisco, and Austin – cities where rent increases of nearly 10 percent per year had been the norm since 2010. In Manhattan and Brooklyn, rents have actually dipped over the past year.

Some of this movement is driven by the shift in demand from higher-priced coastal cities toward fast-growing locales in regions such as West Texas and the California exurbs. But overall, twice as many cities saw rents decline in November than in October, as a large crop of recently built multi-family buildings continues to absorb existing demand even in growing areas.

In addition, due to low unemployment rates, young Americans who have been squeezed by rising rents since entering the workforce are likely to finally find their wages growing faster than their monthly bills, allowing them to amass vital savings before springing for a mortgage.

New construction will put downward pressure on prices for low- and mid-priced homes.

At the same time, mortgages aren’t getting any cheaper. Both prices and interest rates have increased steadily since the summer, and are on track to match all-time highs set last December as the stock market raced up following the election.

If this increase had the hallmarks of a long-term trend, buyers would be justified in getting in. But most analysts predict a long price correction in the near term. The ratio of home prices to residents’ income rose to 4.0 this month – just one-tenth of a  percentage point shy of the 4.1 percent threshold that has historically marked danger. What’s more, the cap in the mortgage-interest tax deduction contained in the coming congressional tax bill is likely to spur construction of lower-price housing stock. This new construction will put sustained downward pressure on prices for the low- and mid-priced homes that appeal to first-time buyers.

Slow and Steady

Millennials have other reasons to take their time before buying homes.

First, the stock market has become an alternative source of savings. Stock prices are historically more likely than housing prices to maintain their upward trend, and the absence of a hefty down payment means more flexibility for lower earners.

We’ve already seen the consequences of too many buyers chasing the American Dream without proper care. Finally, delaying homeownership allows young people to more deftly navigate the job market during the most crucial stage of their careers. A 2017 report from the U.S. Census Bureau showed that Millennials are moving at a lower rate than either Gen-Xers or Baby Boomers did at the same age, meaning fewer young people are taking off to pursue better wages. Buying homes too early is one way that people anchor themselves in place, foregoing opportunities to find better-paying work in a different part of the country.

Though some had predicted its demise, homeownership is likely to remain at the core of the American Dream among the upcoming generation. But we’ve already seen the consequences of too many buyers chasing after that dream without proper care. In the current climate, Millennials have particularly strong reasons to adopt a slow-and-steady approach, rather than racing into homes at the first sign of affordability.

Reprinted from Economics21.