Lack of Attainable Housing Stymies Millennial Generation
Why many would-be home buyers are renting — for now
Here’s the good news: Income growth among 25- to 34-year olds — the millennial generation — grew 5.6 percent last year. And first-time homebuyer loans are up. Millennials are buying homes and debunking the myth that they don’t want to be homeowners. High student loans are beginning to fade in the background and they’re marrying and starting families. With that comes the urge to have a home of their own.
While they’ve put off buying a home longer than other generations — the average age of a first-time home buyer is 33 — “the leading edge of millennial population is just now becoming the ‘new normal’ of home ownership,” observed U.S. Homebuilding Analyst with Bloomberg Intelligence Drew Reading at the Bloomberg Intelligence + Metrostudy Homebuilding Strategy Summit in March.
Entry-level demand is increasing
“As more [millennials] age, there’s huge demand behind home ownership,” he said. “This large base of population growth gives you the sense that demand for entry level, either in rental or the for-sale market, will be strong in the next several years.”
While some millennial buyers are purchasing more expensive homes in urban areas, most are struggling to get into an entry-level home. That’s because their income growth hasn’t kept pace with the price appreciation on the bottom third of homes on the market, generally considered entry-level homes. They’re paying 30 percent or more of their income on rent, which has made savings for many impossible.
Low savings rates keeps buyers sidelined
In fact, ISI Group’s Homebuilding & Products Analyst Stephen Kim said that between 30 and 67 percent of all renters are saving $0 a month, due mostly to high rents squeezing their abilities to save. “Today’s savings are tomorrow’s down payment,” he said during the Bloomberg Intelligence + Metrostudy Homebuilding Homebuilding Strategy Summit.
When they can save, expectations for a down payment are unrealistic. An Apartment List survey of 30,000 millennial renters from November 2015 to February 2016 showed, for example, that millennials expected a 20 percent down payment on an entry-level home in Seattle to be around $26,800, when it was $49,995.
The survey, which covered 93 metropolitan areas and 130 cities nationwide, also reflected that affordability is their biggest concern: 79 percent of millennials want to buy a home, yet they can’t find affordable housing.
With constrained supply of entry-level resale and new homes, many would-be buyers are stuck on the sidelines, chomping at the bit to get in the homeownership game.
Undersupply drives rentals
That’s true in Tampa, where Tony Polito, regional director of Metrostudy Tampa/Sarasota in Florida, said, “The gap between new and used is tremendous in Tampa, as there’s very little ‘entry-level’ product in the market.” According to the U.S. Census Bureau, “Tampa had the fifth highest population gain, adding more than 58,000 residents through migration in 2016. Tampa is undersupplied with homes for sale, and that is driving people to rent.”
For their part, public builders have focused on the move-up market. Yet with the millennial generation now outpacing every other buying demographic today, they’re beginning to target the entry-level buyer — and seeing tremendous success in a variety of markets.
Houston a bright spot for affordable homes
One of those hot markets is in Houston, where in the first quarter, it was the second-highest volume new home market in the country, according to Lawrence Dean, Metrostudy’s Houston regional director. The strongest volume of new home starts —25,789 — hovers in the $200-$299,000 price range.
DR Horton has been a popular builder among homebuyers, and closed 930 of its Express entry-level homes there last year alone. “They introduced the Express brand in Houston three to four years ago,” Dean explained. “It’s become a big enterprise in Houston.”
He also has watched builders and developers step up the pace on more affordable, new homes over the past ten months, by focusing on smaller, more-efficient home products. “They’ve realized most of that growth is centered around millennials who are entering a new life stage, and Baby Boomers who want to downsize to something more cost effective.”
Huge population growth means more new homes
With Houston’s reliance on the oil and gas industry, you’d think population and demand for homes would reflect today’s oil prices. Yet it’s a mecca for population growth. Dean explained that in 2015, which was a “tough year all around,” Houston added 159,000 to its population — all of which has “definitely helped our new home market in terms of volume.”
And while Houston has always been more affordable than most markets, “the floor has definitely risen,” Dean said. Affordable, single family new homes now range from $200,000 to $400,000, with builders focusing on the $300,000 range.
Those who can afford the least amount of house have been pushed to resale. “From a macro housing affordability stance, it’s not a situation where families are priced out of home ownership, but new home ownership.”
Lot of land, few regulations
Houston is a flat, expansive region where there’s a lot of developable land, and very few developable regulations, “so we can build a lot of housing,” Dean added. That leaves the playing field nearly wide open for local and national builders alike.
Privately owned local builder Chesmar Homes, for example, “was the first to bring back duplex townhomes into master-planned suburban communities. They’ve developed very attractive and well received duplex/townhome product in some pretty highly desirable communities for $200,000 and even below,” he observed.
And, of course, there’s the DR Horton Express product, where “it’s a builder and brand that’s leading the march on affordable housing,” Dean noted. Dean shared proprietary Metrostudy data that illustrates DR Horton’s capture of this opportunity. Since the first quarter of 2015 the volume of new home closings overall has decreased by 6.3% in Houstong, while Express closings have increased by 65.3%.
“Houston has always been an affordable market — and it’s now playing to our strengths, more so than other markets,” Dean stated.