Home ownership has always been heralded as the great American dream but it appears to be a dream that is slow to be realized by younger generations of Americans. Between 1950 and 2005, home ownership rates rose fairly consistently, from 50% to 68.9%, with the exception of the 1980’s where rates remained essentially flat. Since the peak in 2005, overall home ownership has fallen to 63.7%, the same rate as 1980. While each age group under 75 has experienced declines, those potential home buyers between 25-44 have seen the most dramatic changes of all, experiencing more than an 8% decline in home ownership between 2000 and 2014.
There is a lot of speculation about why this decline is occurring, especially among the youngest adult generation, the Millennials. Is it because they’re just slower to settle down and make “adult” decisions? Is it because they’re still in school? Is it because they don’t mind living with their parents? Is it because they have too much debt? Is it a residual effect from the great recession? The answer is probably a combination of all these reasons.
More Millennials are in college than previous generations and more continue to live with their parents after they’ve completed their education. One could point to economics as the driving reason, getting launched today can be an expensive proposition. However, we should also acknowledge the stronger relationships parents have with their young adult children compared to previous generations. Surveys indicate that parents today say they have fewer serious arguments with their young adult children then they themselves had with their parents, and Millennials will often point to their relationship with their family as a primary reason for living at home. Not only are more Millennials staying in school longer than older generations, according to an analysis of The National Longitudinal Survey of Youth (based on US census data), they are also experiencing other important milestones at older ages than previous generations; for example, marriage and children are all occurring later than they did before. Since the decision to purchase a home is frequently triggered the arrival of children, and since two incomes are often required to afford a home, these social trends could help explain some of the decline in home purchase rates.
The dramatic rise in student debt is often called out as a primary driver for the decline in home ownership and while the increased debt loads are alarming, there have been several studies, including one by the credit bureau, Transunion, that indicate there are only modest differences (3-4%) in mortgage participation rates among those with student debt, and those without. They also looked at how those differences may have changed over time, comparing surveys completed in 2005, right before the sub-prime mortgage crisis, and in 2009 and 2012, and have seen very little change between the two groups, suggesting that while it may influence the decision to buy a house, it’s not a sufficiently big enough difference to fully explain the declines in home ownership.
So the decline might be explained a little bit by changing socials trends, and a little more by increasing student debt loads… what else might explain the decline? The “Housing Bubble” and sub-prime mortgage crisis has tightened lending standards and limited the ability of younger generations to qualify for a mortgage. According to the Urban Institute’s report, “Opening the Credit Box”, “The average credit score on loans to purchase homes this year (2013) is over 750, some 50 points higher than the average credit score, and 50 points higher than the average among those who took loans for home purchases a decade ago, before the housing bubble.” According to FICO, over 75% of Millennials fail to meet that threshold.
While it’s likely that these factors and a few others collectively explain the decline in home ownership rates among our younger generations, why should we care? Because homeownership impacts the overall economy as well as personal wealth. Historically, home ownership and all that it entails, was viewed as an important economic driver and indicator of overall prosperity and likewise, homes as personal investments were an important asset for retirement planning, but whether they continue to be the investment of choice remains to be seen. The Millennials have already challenged some of our conventional social norms, so we’ll have to wait and see whether their home buying behavior changes or will they break new ground and discover more attractive investment alternatives that fit the way they want to live.