Coming off the housing market collapse, the rebound in home prices has been a breath of fresh air for the economy. Fewer underwater homeowners, fewer homes in foreclosure, and fewer brokerages going out of business are all positive developments for the industry. On the flip side of the housing recovery, however, lies an affordability crisis, particularly for Millennials who are just beginning to turn their eyes toward homeownership.
As noted in the 2016 Swanepoel Trends Report (see chapter titled: Societal Changes What Millennials Want in Housing), the growth of smaller towns and edge cities directly relate to affordability. Nothing affects the cost of living more than housing. The typical young adult in San Francisco, Los Angeles, and San Jose doesn’t even make half of what’s needed to afford a home.
Leveraging data provided by the U.S. Census Bureau, Zillow Group Inc. and Bankrate.com, a Bloomberg study titled: These Are the 13 Cities Where Millennials Can’t Afford a Home found that out of the 50 metropolitan areas researched, only 74% of them (37 cities) are affordable to Millennials. The problem, indicated in the study is that the remaining areas that are not affordable are the ones that are most appealing.
Millennials’ preference for housing is not all that different from previous generations, according to NAR. Eighty percent of buyers 34 years old and younger purchased a detached single-family home. Their purchase rates of condos and townhouses are not substantially different than those in the 35-49 and 50-59 age ranges, NAR data showed. The 69-89 year-old consumer is more likely to purchase a condo than a Millennial, presumably because that group no longer wants to deal with lawns, maintenance, and the work involved with maintaining a single-family home. Furthermore, Millennial buyers’ preference for neighborhood type resembles older buyers’ tastes. Another convergence: they are just as likely to renovate their home as older age groups, a June 2015 report from home remodeling and design marketplace Houzz found.
The clear preference for easy commutes is one area where Millennials differ from other generations. In addition, they want friends and family closer, the NAR survey showed. Smaller differences include: easy access to parks and recreational facilities and to entertainment/leisure. However, affordability trumps all: 58 percent of buyers 34 years old and younger chose less-expensive neighborhoods compared to 44 percent of consumers between the ages of 35 and 49.
These demographic trends drive the housing market, which in turn drives the real estate industry. There are two significant consequences of this set up as the 2016 Swanepoel Trends Report outlines, that consumers of all ages are utilizing technology to approximately the same degree—as opposed to Millennials operating on higher comfort level with technology than any other generation—and that affordability is primary driver of Millennials are not settling down in urban downtowns and major cities as originally predicted, a top concern among Millennials buffeted by powerful economic headwinds.
As the economic recovery dawdles along, many Millennials remain underemployed or unemployed, they delay family formation, and they struggle against high levels of student debt. As such, are not going to be buyers anytime soon. Following are three key issues connected to the affordability crisis.
First, housing affordability is now directly related to overall economic growth. Employers can do the math; many are relocating to or expanding into smaller towns and edge cities where they can hire educated and well-qualified employees at lower salaries because housing prices are lower.
Second, as affordability becomes a more onerous issue for more homebuyers, a government response is likely. Unfortunately, most government responses are ineffectual, to put it mildly. San Francisco recently faced Proposition G, which would have imposed an additional transfer tax on properties owned for fewer than five years. Proponents called it an “anti-speculation” measure to protect tenants, but San Francisco Realtors® helped defeat it. However, as affordability continues to be a critical issue, regulators, legislators, and government agencies such as the Federal Housing Administration (FHA) will face increasing pressure to step in and address the problem.
Third, affordability is almost always connected to local policies and regulations. Whether those policies are good or bad depends on the area, so agents should thoroughly understand the specific causes of the affordability issue in their market. Furthermore, local Realtor® associations, as the primary vehicle for engaging with local economic policies that drive or exacerbate affordability, should play stronger and more influential roles to help address local housing affordability.
Finding a Solution
It is important that brokers and agents in growth cities are able to service, connect with, and sell to Millennials—they are the future, and it is now. Affordability is the big housing issue for Millennials. They might want to live in downtown lofts, but they simply cannot afford it. They might want to live in San Francisco or Washington, D.C., but they are moving to places like Charlotte and Bakersfield for housing they can afford. Affordability will be the single biggest factor impacting housing over the next decade.
To work successfully with this up-and-coming generation, agents will need to discard outdated, hype-driven assumptions about what they want, and understand that, in general, this generation wants what all real estate consumers want—great, knowledgeable service.
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