Will 2016 be the year of the Millennial homebuyer?
A new force could be awakening in the housing market: Millennials.
The lack of interest in buying homes among American young adults has been well documented. Changing demographics, cultural shifts, student debt and the Great Recession have all undermined Millennials' interest in owning homes.
However, new research suggests the largest American generation could be at the cusp of a turnaround when it comes to homeownership.
From 2007 to 2012, homeownership among 25- to 34-year-olds plummeted by 300,000 annually, despite strong population growth in the same age group. Then, in 2013, the decline moderated to just 100,000 fewer young-adult homeowners, according to the Census Bureau's American Community Survey. In 2014, ownership rates among Millennials were essentially flat, Fannie Mae says.
Are we turning the corner? Several indications say yes.
First of all, population growth among Millennials is expected to remain strong, with the number of 25- to 34-year-olds expected to increase by more than 500,000 annually for the rest of this decade.
"Strong population growth could soon generate increases in the number of young homeowners, even without much improvement in homeownership rate trends," Fannie Mae says in a December research note. "Given that the young-adult population is expected to continue expanding rapidly during the second half of the decade, it would take only modest further improvements in homeownership rate trends for the number of young homeowners to return to growth."
Additionally, low unemployment rates and rising wages are making it more likely first-time homebuyers can afford a mortgage. Rates are expected to remain near historically low levels in 2016, even as the Federal Reserve tightens monetary policy. And Fannie Mae and Freddie Mac have rolled out several mortgage products that require just 3% down payments, lowering a common barrier for young-adult home purchases.
There's also this interesting development: Researchers at the University of Southern California Lusk Center for Real Estate in 2015 reported new household formations had returned to pre-recession levels, after cratering for several years. Millennials are finally moving out of Mom and Dad's basement.
Of course, there's no doubt cultural shifts will continue to create headwinds. Millennials carry massive loads of student debt. They're putting off marriage. Many choose to rent rather than buy so that they aren't tied down. But even these trends will begin to shift soon.
A report from Goldman Sachs in 2015 indicated Millennials who rent actually dream of buying. A shocking 93% of renters age 18 to 34 say they want to own a home in the future. And even though Millennials have delayed marriage and child-rearing, 70% still say they want to marry and 74% say they want to have children.
The generation also has a clear commitment to overall health and wellness. When homeownership is seen as a needed or wanted piece to an overall lifestyle, it will become a greater priority for young adults.
"As Millennials enter their peak home-buying years, their reluctance to enter the housing market could change," Goldman Sachs researchers say. "The cohort's sheer size, plus its desire to settle down in the future, could lead to a surge in home sales."
The takeaway? Millennials are a massive generation with enormous spending power. While early adulthood has bucked the norm of previous generations, millions of these Americans now entering their late 20s and early 30s are earning more money, planning to have families and now view homeownership in a new light.
