The recession, in association with the subsequent rebound, has made it increasingly difficult for prospective first-time homeowners to actively participate in the market. Of particular concern, however, are the ill effects this void has had on the housing sector. Economic circumstances have prevented an entire generation of potential buyers from contributing to the housing market. According to the Mortgage Bankers Association, a lack of participation by first-time buyers is expected to drop both new and existing home sales figures for the first time since 2010. The forecast serves as a reminder as to why the rebound has yet to gain traction.
Fortunately, encouraging signs have signaled an end to their financial struggles. The crisis that has burdened millennials for years appears to be easing. Experts predict that a strengthening labor force will allow millennials to contribute to the housing market within two to five years. The influx of new buyers is expected to stimulate the U.S. housing sector and remove it from the doldrums in which in currently resides.
Approximately 85 million people make up the millennial generation – those born in the early 80s through 2000. It is these individuals that are said to have received the brunt of the downturn. 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 buy a home.
“This recession was unusual in that it was severe and protracted,” said Holzer, who served as chief economist for the Labor Department. He said the previous slump in 2001 wasn’t as deep and graduates who entered the job market then were mostly able to find employment by 2004. That is not the case with millennials.
In addition to employment, millennials have had to make do with insufficient wages. The average annual earnings, adjusted for inflation, of Americans from 18 to 34 who worked full-time fell by about 5 percent from 2007 to 2012, according to the Washington-based Progressive Policy Institute. The general population saw an increase of 2 percent during that time.
Compounded, these issues make it highly unlikely that the average millennial would be able to afford a standard mortgage. Their situation, through no fault of their own, made it difficult to qualify for a mortgage. The presence of first-time homeowners was negligible. After reaching 50.1 percent in 2005, the homeownership rate for people in their 20s and 30s fell to 42.2 percent in 2013.
“Given the Great Recession and the slow recovery, millennials have faced very difficult economic circumstances,” said Richard Fry, a senior economist at the Pew Research Center in Washington. “But they have a very significant tailwind. They are more educated than any generation before them. All of those college degrees will sooner or later pay dividends and they will buy homes.”
It appears as if their time will be sooner rather than later, as experts predict the labor force to pick up in the foreseeable future. An improving labor market will benefit those with degrees currently seeking careers. In 2012 a record 33 percent of Americans from 25 to 29 had completed at least a bachelor’s degree, compared with 17 percent in 1971.
The suggested surge in the labor market is great news for the housing sector, as first-time buyers are an integral cog in the real estate industry. Their presence is the catalyst for a chain of events that must take place in a healthy market. With their participation, more homeowners will be awarded the opportunity to trade up. According to the National Association of Realtors (NAR), approximately 27 percent of the existing-home sales in May involved first-time buyers compared with an average of 35 percent dating back to October 2008.
We need first-time buyers to enter the market, and it appears as if they will be primed to do so in the coming years. Employers have already acknowledged that they intend to hire 8.6 percent more graduates from the class of 2014 than they did from the previous year. An emphasis has been placed on degrees in accounting, engineering, computer science and business. Perhaps even more encouraging, are projections released by the Labor Department. According to data, employment in occupations requiring a bachelor’s degree will expand 12.1 percent by 2022. The jump appears to be even higher for those with a master’s degree.
All of these numbers support a strengthening housing sector. However, expectations may need to be tempered. Lawrence Yun, the chief economist at the NAR, believes that the millennials participation within the housing sector will take about two years to make a noticeable impact.
Banks are expected to become more lenient on their lending practices. This is most likely as a means of recouping lost revenue from diminished refinancing. However, less stringent lending will help younger buyers significantly. Prospective owners that were neglected in the past will find it easier to qualify for a loan. Last month, the Federal Housing Agency made its own moves to spur lending to younger buyers. In an attempt to stimulate the mortgage market, the FHA plans to reduce the risk banks face when loans default.
The rise in millennial homeownership may take hold in cities where jobs are already plentiful and the cost of living is cheaper. Cities in Texas and North Carolina, in particular, are potential candidates to kick start the millennial buying craze.