The housing market makes millennials feel “disenfranchised” and “locked out,” economist Mark Zandi says.
Few milestones in life mean as much to the American Dream as owning a home. Millennials have faced the kind of problems that are well-suited to their generation, which largely emerged from the disastrous job market after 2008. As they enter peak homebuying and family-forming age, housing affordability is at its lowest level in forty years, and rates are approaching Mortgage rates are at their highest levels in forty years.
The anxiety this generation feels about the prospect of never owning a home of their own affects their entire perception of their finances and the economy, says Mark Zandi, chief economist at Moody’s.
“If they feel like they’re being deprived of owning a home, it changes their perceptions about everything else that’s going on in their financial life,” Zandi says.
Millennials have long suffered from a brutal housing market. They faced not one, but two catastrophic economic events — the great financial crisis of 2008 and the pandemic in 2020. Both left them reeling financially and struggling to afford a home. The Great Recession devastated the real estate market as the economy nearly collapsed under the weight of weak mortgage-backed securities. While the pandemic brought with it a boom in remote work that caused millions of city dwellers to flee to the suburbs, sending housing prices soaring.
Failure to address the housing affordability crisis plaguing the United States will mean that young people, who “already feel disenfranchised,” according to Zandi, will lose confidence in the economy and take out their frustrations on President Joe Biden on Election Day. (luck He was speaking to Zandi in the context of his team’s analysis that predicted the outcome of the 2024 election based on economic results.)
Bad news for Biden
“Homeownership is unaffordable,” Zandi said. luck. “If affordability appears to be getting worse and their odds of becoming homebuyers diminish, that will undermine Biden’s re-election bid.”
Then, last October, mortgage interest rates rose to their highest levels in more than two decades when they exceeded 8%. For millennials, these higher rates combined with the recent cost of living crisis seem to make owning a home more likely. Now, though, mortgage rates are falling, hovering around 6.8%, giving potential buyers hope that the housing market may become more manageable.
When interest rates reach 6%, “people feel like they have a chance to become a homeowner at some point,” Zandi says. “Mortgage rates are actually very critical” for that.
Although the current rate is still a far cry from the rates of 2.6% in January 2021, which were among the lowest rates ever recorded. They are unlikely to return to those levels but are expected to continue to decline. Some estimates indicate it is as low as 5.5%. Other economic indicators also point to an improving economy, with low inflation and a continuing strong labor market.
When combined with the decline in mortgage rates in the past few months, it should make things easier for millennials to buy a home — something they care about a lot. A December analysis note from Bank of America Research found that homeownership is more important to millennials than it was to their parents when they were the same age. One reason this generation in particular places such a priority on home ownership is that it is a way for people to insulate themselves from other forms of economic disruption.
“The goal of homeownership is growing because of its importance as a respite from a volatile economic environment,” says John Walkup, co-founder of real estate analytics firm UrbanDigs.
The plight of older millennials
This doesn’t mean it’s completely impossible for Millennials and Generation Z to buy homes. In fact, a Bank of America research analysis found that younger millennials, ages 28 to 35, were closing the homeownership gap compared to Generation X and baby boomers. There have been some improvements since the pandemic, with youth homeownership rates higher than they were in 2019, according to progressive economist Dean Baker. However, it remains lower than it was before 2008 and the epic housing recession. However, both numbers show that Millennials have not fully recovered from some of the economic shocks they have experienced.
Older millennials in particular are bearing the brunt of these multiple economic setbacks and the current affordability crisis. They found an exceptionally challenging housing market at the same time as they were saddled with exorbitant student loan debt and the recession that hit them as they entered adulthood. One housing industry executive estimates that homes are so unaffordable that incomes would need to rise by 55% to keep up with prices.
A large part of the American Dream is tied to purchasing a home, not only because of the emotional factors of owning a home, but also because it is an important source of building wealth. “Historically, real estate has been a surefire way to unlock wealth… especially for the middle class,” says Monisha Rana, a real estate broker with Coldwell Banker Warburg in New York.
The net worth of the typical homeowner is 40 times higher than that of someone who rents, according to the National Association of Realtors. Selling a home, especially if its value rises, which is likely this year given Morgan Stanley’s forecast of a 5% increase in home prices, could create a windfall for families who have much of their net worth tied up in their home.
Failing to own a home can have long-term effects on an individual’s financial situation for life.
Homeownership is about “deeper feelings about the economy, especially for young people,” Zandi says. “If they can’t afford a home, it really undermines their overall thinking about everything else, when it comes to the economy — their jobs, their wages, their net worth.”