Friday, June 9, 2017

The Millennial Question

One question we often get asked is: "What is going on with the millennials?". Since the preferences of Portland's largest generation exerts a strong influence on future housing demand , it is important for planners, utilities, banks, and even everyday housing market participants to know if this generation is an anomaly or will eventually eat up all remaining single family homes. This article attempts to answer that question, and appeared in NERC's biannual forecast release:

Millennials, the largest generation in the Portland MSA, appear to defy the life trajectory observed in previous generations, making their behavior notoriously difficult to predict. While loosely defined as being born between 1977 and 1995 (according to Nielsen Media Research), they are more directly defined as the first generation to be engulfed from childhood in the age of the internet, cell phones, and social media. There is a growing belief that millennials would prefer to spend their resources on experiences – e.g., eating exotic foods in strange places – rather than on the large durable good purchases enjoyed by previous generations – e.g. a house and two cars. Perhaps this is due to instantaneous access to unprecedented information, or maybe the experience of a massive, debt-induced, financial crisis during their formative years, but if this change in spending proves persistent, then the growth seen in cities will continue and the suburban revival will be postponed at least another generation.

 However, surveys indicate that millennials aren’t all that different from previous generations. A 2014 Zillow survey found that almost two thirds of young adults think that owning a home is necessary to live “The Good Life”, and 80% of renters are at least “somewhat confident” that they will eventually be able to afford a home . A 2016 National Association of Home Builders survey found that 68% of millennials want a detached single family home (compared to 65% for all buyers) . Furthermore, a 2015 Urban Land Institute survey found that 70% of millennials expect to own a home by 2020, even though only 26% currently own one . So the question is, if owning a single family detached home is what millennials want, then what is stopping them?

The answer is affordability, or rather, the lack thereof. Assuming that the average millennial household in Portland spends 30% on mortgage payments, puts 20% down, and gets a 30-year fixed mortgage at 4.25%, then the house they can afford costs approximately $393,600 (assuming earnings equivalent to the median 2015 household income for the 25-44 age group [$64,635]) . According to Zillow, the median home value for the Portland MSA in February was $358,700, so right now owning a home is well within reason. However, 42% of millennials carry student debt , and the average student loan repayment is $351 a month for those in the 20-30 age bracket . This is an expense not borne to the same degree by previous generations, and it leaves millennials financially impeded in relative terms. A recent Federal Reserve of New York study found that a 33 year-old with some level of student debt was 5% less likely to own a home than one with no student debt . Finally, increasingly strict lending standards – the average FICO score on closed conventional new purchase loans was 752 in February – mean that the pool of potential home buyers shrinks even more significantly.

Coming out of the Great Recession, a millennial household needs greater than average financial resources in order to be able to afford a home at the median price in the Portland MSA. However, this doesn’t mean millennials will never be able to afford buying in the Portland MSA--incomes have risen significantly in the past few years, and an increasing inventory should moderate the growth in house prices. It is probable that demand for single family homes will continue to rise as more millennials form families, increase earnings, and age into prime homeownership years; the factors discussed above have merely delayed life events that happened at an earlier age in prior generations.

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1. Harris Poll. (2014). “Millennials: Fueling the Experience Economy.” Conducted for and released by Eventbrite.com. 
2. Terrazas, Aaron. (2014). “Zillow’s Housing Confidence Index: Will Youthful Exuberance Today Mean More Sales Tomorrow?” Zillow.com. 
3. National Association of Home Builders. (January 21, 2016). “Millennials to Shape Housing Preferences—Once They Start Buying.” NAHB.org. 
4. Brett, Deborah L and Lachman, Leanne M. (2015). “Gen Y and Housing.” Urban Land Institute. ULI.org. 
5. United States Census Bureau. “2011-2015 American Community Survey 5-Year Estimates for Portland-Vancouver-Hillsboro OR-WA Metro Area.” FactFinder.census.gov. 
6. Institute of Politics at Harvard University. (2013). “Fall 2013 Survey.” IOP.Harvard.edu. 
7. Elvery, Joel. (May 16, 2016). “Is There a Student Loan Crisis? Not in Payments.” Forefront. Clevelandfed.org. 
8. Chakrabarti, Rajashri, Gorton, Nicole, and van der Klaauw, Wilbert. (April 3, 2017). “Diplomas to Doorsteps: Education, Student Debt, and Homeownership.” Liberty Street Economics. LibertyStreetEconomics.newyorkfed.org. 
 9.EllieMae®. (February 2017). “Origination Insight Report.” CDN.Elliemae.com.