Disclosure: I am a "Millennial," a homeowner, and have worked in real estate for the past six* years.
In our modern era, one can usually expect the enlightened Fourth Estate to come to the party late, drunk, and utterly confused. True to form, they are only now just starting to display the slightest tinge of apprehension regarding our "Reluctant Recovery."
"As Home Ownership Lags, Young Renters Left Behind in Wealth-Building"
Dana Bergman signs over a third of her take-home pay to a landlord in Los Angeles. Jonathan Karadimas just hopes he can pay off his student loans before he retires — a date the 26-year-old New York resident won't hit for nearly four decades.
These young adults are a continent apart, but they share a troubling condition with many other 20- and 30-somethings: They're renters, tenants in their own lives. Weighed down by high student loans and low credit scores, squeezed by rising rents and required down payments, homeownership is a distant goal, and economists worry that these millennials are missing out on a crucial opportunity to build wealth.
I'd worry too if every econometric shenanigan I'd ever been taught left me unable to foresee even the smallest economic development. They'd probably have better luck forecasting the market by gutting a hare and reading its entrails.
Bergman, who works in her family's construction business, has resigned herself to looking for a home somewhere with cheaper prices, like Texas or Arizona. "I would love to buy a house, and that's pretty much why I'll probably be leaving L.A.," she said. "It's not feasible."
Bergman splits her $2,200 monthly rent with a roommate, and previously rented a single 10-by-12-foot room for $900 a month. "The cost of living is ridiculous out here," she said.
A lot of other millennials are coming to the same conclusion. Harvard University's Joint Center on Housing Studies finds that homeownership is at a two-decade low. Household formation is also down, according to research from the Urban Institute. By 2030, only 38 percent of millennials will own homes, compared to 46 percent of baby boomers at that stage of their lives, the group predicts.
This last prediction may be overly-optimistic.
In 2014, 46 percent of renters between 25 and 34 years old spent more than 30 percent of their income on rent; nearly 20 percent paid more than half of what they made, according to Harvard.
With so much money going to rent, these young adults have little left to put toward a down payment, which is a problem since homes are typically Americans' largest assets, and a key way families pass on wealth through the generations.
This touches on one of the key oversights in the general housing market outlook. We are not seeing the growth in personal equity and investment capital among the Millennials that economists were relying on in their predictive models. What we are seeing is a partial transfer of wealth from the Boomer/Early-X generations to their kids, and even that looks to be an underwhelming market force. So the few Boomers that did not experience wealth destruction in the "Great Recession" might pass on their wealth to their children, but the rest? They'll be relying on Social Security, of course! To reiterate, fewer Boomers than expected will be able to pass wealth on to their children/grandchildren (or even take care of themselves), and those who are passing on wealth are only counting for one of the two late-in-life transactions that economists have been counting on. Essentially, we've gone "all-in" on a weak hand.
"I think the biggest problem is the down payment, and I think that's the big divider that's going to bifurcate the market among millennials," said Selma Hepp, chief economist at real estate site Trulia. "That may lead to further inequality among that group."
And for the low, low price of $600,000, you too can become an Ivy League PhD and state the obvious. Quick rule of thumb: any chief economist that uses buzzwords like "inequality" will probably be more surprised by economic developments than the average homeowner.
But even young adults who manage to save enough for a down payment may find that they're shut out of the housing market because they can't qualify for a mortgage in the post-real estate crash market. A study by credit bureau TransUnion finds that fewer than 20 percent of the 7 million people whose credit was damaged by the mortgage meltdown could qualify for a mortgage today.
How about that recovery, boys?
Unfortunately, the window of opportunity may be closing for many would-be homeowners. Rock-bottom interest rates are a huge benefit for people buying real estate today, but those rates will inevitably rise, and lock out a significant number of prospective buyers.
There's your shot...
The only answer she can see is to leave a city she has called home for the past six years. "My plan is pretty much to take my network, take my education ... and go somewhere where the cost of living is less."
...and the chaser.
What this all amounts to is that we are seeing a fundamental change in the makeup of the American economy, by which I mean a fundamental change in the American people - their wealth and general inclinations. One could say that the "Great Recession" of 2008 functionally destroyed much of the economic growth we'd achieved over the last fifteen** years or so, but that wouldn't be quite right. It would be more true to say that it revealed how little of that perceived wealth was grounded in genuine wealth accumulation, and how much of it was based on the illusory growth caused by the nigh-unrestricted flow of easy credit.
**These fifteen years represent the most recent flow of investment, but one could argue that the "economic growth" of the last 40+ years has been based less in sound business, and more in socio-political fiat.