We’ve just talked about the Millennial generation’s impact on the luxury real estate market and their desire for updated, move-in ready homes (see: https://www.beachchatter.com/2021/02/11/millennial-preferences-reshaping-luxury-market/). It turns out there’s another type of home that Millennials are itching to buy, and it’s quite on the opposite side of the spectrum. They’re moving across the country to buy old, cheap houses in need of extensive renovation.
Not all Millennials have the income to enter the luxury market, so for those with budget constraints, the alternative is to expand the search radius. There are plenty of houses under $100,000 that are in need of some updating in historically less desirable areas. A Utah couple bought a Victorian-style 1885 house in Connecticut for $85,000. They’re expecting to spend about $100,000 to remodel it. This is still far below Utah’s median house price of about $575,000. It’s likely that this trend will continue, as work-from-home enables prospective buyers to look anywhere within the country. More expensive areas such as New York City have already had a significant exodus.
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There may be a surprising answer as to why younger generations have seen increased rates of living with their parents. Popular belief is that they’re either too lazy to get jobs or simply saddled with too much college debt. While lack of employment and exorbitant tuitions definitely play a role for some of them, Millennials are actually the largest group of homebuyers, so what’s true for some won’t be true of all of them. It appears some contingent of them have simply been biding their time, waiting for the perfect opportunity to skip past starter homes and enter straight into the luxury real estate market.
College may have brought with it a mountain of debt, but as a result, Millennials currently are the most educated group of buyers in the US and are earning more than any prior generation. They are also set to inherit more than prior generations did. It takes time, but they are able to save up money to buy a house. And not even just a house — the first homes of some Millennials are multi-million dollar residences. Of course, this is partly because rising prices have meant that more areas have multi-million dollar homes for sale. But another reason is Millennials’ wishlist items: move-in ready, good walk score, high-tech green features. These all add value to a home, making Millennials’ tastes — while not ostentatious — expensive.
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2018 began with very high prices, at historical lows for interest rates, and in a seller’s market. That’s shifted in the last few months, with price growth dwindling, high interest rates, and the beginnings of a buyer’s market. Here’s what a few experts are predicting that means for 2019.
Aaron Terrazas, Zillow’s director of economic research, expects mortgage rates to continue rising. Despite the rate of growth, they’re still low for the current state of economy. Terrazas predicts a 30-year fixed rate of 5.8% in 2019, not seen since the recession in 2008.
First American senior economist Odeta Kushi and chief economist of Realtor.com Danielle Hale both predict increased demand among millennials. Many millennials will be reaching the age of homebuying and getting eager to buy at the same time that other segments of the population are hesitating in the face of high interest rates. While both believe millennials will make up a large percentage of buyers, Kushi is expecting many to be first-time buyers, while Hale thinks first-time buyers will struggle financially, so most of them will be older millennials.
The market had been a seller’s market for quite some time, but now the scales are tipping more towards buyers, leading to what is now a flat market. As of June of 2018, home prices were still on the rise, albeit more slowly. But sellers noticed something — they weren’t selling without a price cut. 14% of all June listings took a price cut.
After the crash of 2008, construction has been slow and tilted towards high-end homes and single-family residences. Millennials who are now eagerly looking for their first homes are coming into an environment of lack of housing and especially affordable housing. Sellers are having to respond to prospective buyers’ high demand, but inability to survive in the current market. Currently, that means price cuts. Eventually sellers, and their agents, are really going to catch on and start listing lower. That’s going to bring the market closer to equilibrium.
A trend among Millennials is increasing the percent of unmarried couples buying homes. They aren’t in a rush to get married, but they’re committed, and purchasing a home together is definitely a sign of commitment while being a much more time-sensitive investment. Compared to 1985, the percent of married first-time homebuyers has dropped 18%, from 75% to 57%.
Buying a home without being married can have some added complexity, though. Though most Millennials are too young to think about what will happen when they die yet, it does come up in homeownership rights. Married couples are able to be “tenants by the entirety,” meaning both spouses own 100% of the property and it’s harder to go after one spouse’s debt as long as both are alive. This doesn’t apply to unmarried couples, though. Their choice is between “joint tenancy” and “tenancy in common.” Joint tenancy allows the property to go to the partner after death, while tenancy in common may be better if you want the property to go to your heirs. In either case, banks will hold both parties individually and fully responsible for debt. It isn’t much simpler for single homebuyers who still need to establish inheritance in some way, probably in a will, and are completely on their own in terms of debt.
Prices have been rising for six years and are continuing to rise. When does it end? Analysts think it may be soon. There’s one key difference between the current economy and the last housing boom. Previously, it was accessible loans that drove high buyer demand and thus enabled sellers to safely raise prices to match increasing demand. Now, prices are skyrocketing much faster than income accessibility. Wages are up only 14% compared to six years ago, in contrast to a price jump of 48%. Another factor affecting affordability is that interest rates are going up.
Rising prices have gone on as long as they have because demand is actually quite high at the moment. People who haven’t been able to buy since the recession — particularly Millennials — are trying to take advantage of the relatively more stable economy. The problem is that they can’t afford it, and more are starting to realize that. Demand is beginning to fall off, and with that, prices are going to need to start coming down in order to sellers to manage to sell at all.
While millennial homeownership has been understandably low since 2008, with a record low in 2016, it had actually been climbing in 2017. It was at a three-year high of 36% in quarter 4 of 2017. Now it has dropped again. The figure for quarter 1 of this year was 35.3%. Homeownership rate in general did not drop; in fact, it was steady at 64.2 for two quarters. This is up from the 50-year low of 62.9% in 2016 and the steadily rising 63.6% in 2017. This is because homebuyers between the ages of 35 and 64 are still buying more, even as millennials buy less.
Lack of affordable housing is the clear cause, as millennials today searching for starter homes aren’t able to find much in the way of inventory. At the end of the first quarter this year, starter home sales were down 21% at the same time that high-priced sales increased. Development has been focused on the luxury market, and rising interest rates and prices mean many are still renting because they can’t afford to buy.