Impact of Millennials on the Housing Recovery

The combination of a sluggish economy and its related impact on individuals is hurting the housing market. The ability of individuals, particularly millennials, to buy homes has been limited by such factors as lack of earnings, less-than-perfect credit and over burdensome debt levels (including student loans). (Millennials – also known as the Millennial Generation or Generation Y – are young people born from the early 1980s to the early 2000s.)

Changes in societal trends are also impacting home ownership. According to the Census Bureau, the median age of first marriage has increased to about 27 for women and 29 for men. In 1950, it was about 21 for women and 24 for men. As a result, we are also waiting longer to have children. Life events such as marriage and childbirth typically spur first-time home purchases.

Stricter mortgage-qualification standards since the downturn are also hindering young buyers who often have limited money for down payments and less-than-pristine credit histories. There are also fewer affordable homes available for first-time buyers to purchase. Nationally, the median price of an existing home has risen by 5.2% in the past year to $201,700. The median price of a new home was $275,800 in April, down 1% from a year earlier.

The relative paucity of young adults in the housing market is limiting the home ownership rate as well. According to U.S. Census statistics, it fell to 64.8% in 1Q14, versus 65.2% in 4Q13. It was as high as 69.2% in 4Q04. The drop has been even more rapid for those under 35. The rate declined to 36.2% in 1Q14 from 36.8% in 4Q13. It was as high as 43.6% in 2Q04.

In sum, according to the National Association of Home Builders, first-time buyers currently account for 16% of new-home purchases. This marks a sharp drop from the range of 25% to 28% that existed between 2001 and 2007. In the existing home market, first-time home buyers accounted for 29% of April’s purchases, according to the National Association of Realtors. This represents a precipitous decline from their monthly share in 2009 and 2010 of 40% (it was occasionally above 50%).

These changes in home ownership trends also impact the selection of securities for client portfolios. Over the last couple years, BWFA portfolios have generally excluded homebuilders and other related businesses. Instead, we have initiated positions in businesses that benefit from increased rental property demand. We think these trends may continue for some time, so we believe it is best to focus on those businesses and avoid homebuilders.