This spring will reveal the direction of the real estate market for the balance of the year. That’s good because January and February sales haven’t been so great. January’s sales were less than a year ago and the median selling price declined 11 percent from December. February’s home sales were off 18 percent from last year same month and the median selling price declined 15 percent. If sales and prices rebound in March and April we can expect continued improvement over 2013 but if they continue to slide, 2013 will go down as a small bubble that has already evaporated.
Many positive influences on the market last year are noticeably absent this year. Although the number of listings are steadily increasing now to about 50 percent more than this time last year, buyer demand has been less than enthusiastic. One demographic running late to the housing party is the Millennial buyers.
A traditional element of a healthy real estate market are these entry-level buyers. They are usually in their late 20s and 30s and are a vital first rung on the home ownership ladder. They usually buy from a seller who is trading up to a more expensive home. Healthy housing markets depend upon folks moving up and then eventually down the housing ladder. But what happens when that first tier buyer doesn’t show up?
This huge demographic group should be buying a large percentage of homes. The Millennial generation have been referred to as Generation Y, Generation Net because most grew up with the Internet, Generation Me for their narcissistic behavior and the Boomerang Generation because so many are moving back in with mom and dad.
Time Magazine published a feature story last summer titled “The Me Me Me Generation. It begins: “They’re narcissistic. They’re lazy. They’re coddled. They’re even a bit delusional. Those aren’t just unfounded negative stereotypes about 80 million Americans born between 1980 and 2000. They’re backed up by a decade of sociological research.” That was the flattering first paragraph.
These children of the Baby Boomers are more liberal than their parents. They are more tech savvy, confident, self-expressive, upbeat and receptive to new ideas and ways of living. To a large extent, they will determine the future direction of the housing market. Right now many of them are sitting on the sidelines.
The percentage of Americans who own their home has been falling since 2005 when it stood at 69 percent. According to the U.S. Census, it’s now around 63 percent. In our region, the percentage of homeowners went from a historic high of 63 percent in 2005 to 59 percent today. The homeownership rate for those ages 25 to 35 declined even further from 44 percent to 35 percent. At a time when housing in California has been most affordable, the entry-level, first-time Millennials are choosing not to participate. So what’s up with that?
Despite the growing job market, overall economic conditions are blamed for preventing many Millennials from securing satisfactory employment. Census data shows that while the overall unemployment rate is declining, it is increasing for the 25- 35-year-olds; now at 13 percent. Many Millennials have challenges when attempting to adapt to the labor market.
In his book “Trophy Kids,” Ron Alsop discusses how many young people have been rewarded for minimal accomplishments (such as mere participation) in competitive sports or by teachers for just showing up in class. Now they have unrealistic expectations of working life.
Student debt, which has doubled since 2007, is another issue holding back Millennials from homeownership. According to Rohit Chopra with the Federal Reserve Bank Director of Student Loans, “There is approximately $1,200,000,000,000 in student loan debt owed by around 40,000,000 Americans. This equates to roughly $30,000 in outstanding debt per borrower and does not include what may be a substantial amount of education-related debt in the form of credit card, home equity and retirement account borrowings.”
The ability to be flexible, travel light and relocate when opportunities present themselves make renting more attractive than buying for many Millennials, including the ones that already own their home. According to the MacArthur Foundation, 61 percent of homeowners 18 to 39 say renting has become more appealing than owning a home.
Many Millennials watched in disbelief as their parents lost jobs, retirement savings and homes during the recession. This shattered their previous teaching that home ownership was the cornerstone of wealth.
A down payment is another roadblock for Millennials. They don’t have it and the bank of mom and dad doesn’t either. Many parents, who were once a reliable source for down payment assistance, still have not recovered from the recession.
Millennials will start buying homes; the question is how soon. This reluctant group may need an incentive. There is precedent. In 2008 homebuyers received a tax credit for buying a new home. (This was a huge failure to stimulate new construction, which it didn’t.) There are also numerous federal and state programs that provide financial aid to low or moderate income homeowners.
How about a Home k Account? This would create a sub-account in current retirement savings plans, such as 401(k) plans allowing first time homebuyers to save for a down payment on a tax-preferred basis. Failure to stimulate this reluctant generation into homeownership may prove costly to the rest of us.
Ken Calhoon is a real estate broker and can be reached at [email protected]