For all intents and purposes, the U.S. economy is expanding at an encouraging rate. Just a few short years ago, nearly every industry looked worse for the wear. However, the U.S. has apparently removed itself from the doldrums of the previous recession. As 2015 draws near, the economy is positioned to help more than it has in recent years. Employment forecasts continue to remain positive and even housing prices are recovering. Of particular concern, however, is a distinct lack of first-time homebuyers. Despite favorable conditions, Millennials, as they are often referred to as, continued to remain absent from the market.
According to an annual survey conducted by the National Association of Realtors (NAR), the share of Millennials that are actively participating in the housing market is at its lowest level in nearly three decades. Even with the economy on the mend, and much better off than it was a year ago, younger Americans only accounted for 33% of buyers. Today’s numbers represent a 5% decline from last year. Consequently, since 1991, first-time buyers have made up about 40% of the entire buying pool.
Despite better conditions, younger Americans are still burdened by the downturn, as they were impacted the most by the recession. This group suffered the most during the 18-month recession starting in December 2007, said Harry Holzer, professor of public policy at Georgetown University in Washington. They were often the most recently hired, which made them more likely to be fired when companies cut back spending. Essentially, their inexperience made them expendable. Problems were only compounded in the face of mounting student debt, making it all but impossible to purchase a house.
“Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” said Lawrence Yun, chief economist of the NAR. “Adding more bumps in the road is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”
While the downturn was the culmination of several negligent practices and unfortunate situations, it is impossible to deny that lending practices were largely to blame for the directions things turned. At one point, no-money-down offers seemed to be commonplace. Borrowers that were incapable of paying debts were granted loans beyond their capabilities. Essentially, the attractive offers that made lending institutions appealing and the factors that toppled the economy were one in the same. As a result, too many borrowers defaulted on their loans.
Having already gained traction, the recovery is due largely, in part, to stricter lending practices. Banks had to make a change to prevent a repeat of past transgressions. However, new practices are even stricter than originally anticipated. A recent decision on forthcoming regulations governing mortgage lenders could help ease credit criteria slightly, but lending will not go back to the loose days of the last housing boom.
In addition to lending practices, recent appreciation rates have tempered buying expectations for younger generations. Home prices are nearing record highs, as they have bounced back rather aggressively. Prices rose considerably faster than income growth, and now that investors have slowed their purchases, mortgage-dependent buyers are not picking up the slack, even as rents continue to rise. Higher rents, in turn, are keeping some borrowers from saving for a down payment.
Surprisingly, financing and appreciation rates are not the only factors preventing younger Americans from buying a home. Having recently seen the impact the recession had on their parents, Millennials carry a stigma towards home buying. Renting is simply less of a risk than owning a home and more Millennials are realizing that.
“We are seeing a more mature renter, somebody to whom price is not a large decision-making factor, but we’re also seeing the type of renter who just wants to live in an environment that feels much more like a neighborhood,” said Stephanie Williams, a senior vice president at The Bozzuto Group in Washington, D.C.