Millennials Put Hold on American Dream

Millennials-those born after 1980 through the mid/late 1990s-are not buying homes at the rate previous generations have. To determine why, Bank of America Merrill Lynch conducted a survey of 1000 adults ages 20-34 across various U.S. cities. This is what the company found:

Millennials want to own their own home, but lack the financial resources to do so. 73% of survey respondents report that owning a home is either very important (56%) or important (17%) to them, indicating that Millennials maintain the strong desire to own their own homes consistent with the classic perception of the American Dream. However, Millennials have been negatively affected by cyclical economic factors including high unemployment, lack of wage growth, and lack of credit. 

The study suggests that Millennials may have a distorted image of interest rates as a result of growing up during a time when interest rates were artificially low, hovering around 3-5%. Looking back in time presents a different picture: since 1971, the median 30-year fixed mortgage rate has been 7.98%. Employment for those ages 25-34 is 75.6%, which is more than the low of 73.4 but still behind the pre-recession level of 83%.  Wage growth has been slow, with the real median income for those under 35 falling 16% from $42,000 in 2007 to $35,000 in 2013. Tight credit remains another issue. The average qualifying FICO score as of July 2014 (690 and 760 for an FHA mortgage and conventional mortgage, respectively), is nearly 13 points greater than the average score back to 2000. 

Student loan debt is also hindering first-time homebuyers. One quarter of survey respondents cite that student debt has prohibited them from purchasing a home to date. The median education debt for those under 35 was $17,200 in 2013. It is not a surprise, then, that the survey revealed that Millennials who have student loans are 55% more likely to currently rent than own a home.

Nineteen percent of Millennials are living with their parents. This consists of 31% for those ages 20-24, 16% ages 25-29, and 10% ages 30-34. Many Millennials are living in an apartment (38%) while others have their own home (31%). Not surprising, higher income earners are much more likely to be living in their own home. 12% of respondents making less than $25,000 own their own home, while 60% of those making $75,000-$100,000 own their own home. 

Millennials are delaying household formation, including getting married and having children. Annual household formations of married couples lave dropped 61% for those under 25, 41% for those 25-29, and 18% for those 30-34 since 1982. Mellennials are having fewer kids, and they are having them later in life. Birthrates for women ages 20-29 are decreasing while birthrates for women ages 30-39 are increasing.

As the economy continues to recover and Millennials increase their earnings, they are expected to enter the housing market in greater numbers. Half of those surveyed plan to buy a home within the next five years. The American Dream is not lost: it is merely on hold. 

Post-Grad Housing Market Expected to Improve

90% of Americans 35 and younger prefer to own a home over renting one, according to a recent Fannie Mae survey. However, only 36% do own a home, down from the 2005 peak (43%) and the lowest percentage yet since home ownership by age was first recorded in 1982. Many factors come into play when examining barriers to home ownership, including the following:

• Student debt. It's no secret that the cost of higher education is rising. Moreover, more students are pursuing advance degrades (such as a masters degree or MBA), luring students even further into debt.

• Stagnant wage growth. Recently, wage growth has been offset by higher prices, hindering prosepctive homeowners. 

• Tight lending standards/inadequate credit. Not having enough credit makes it difficult for prospective homeowners to qualify for loans. Tight lending standards make it even more difficult, as lenders are more selective when approving people for home loans. Unfortunately, it takes time to build a good credit score. 

• Competition. Ironically, many of America's "youngest" cities are also the most expensive--New York City, Chicago, Las Angeles, and San Francisco among others. Competition in these cities drives up housing prices, pricing young residents out of the market. Furthermore, people in their 20s and early 30s cannot compete with the all-cash offers that are more common in competitive markets. 

• Low inventory. Low inventory has characterized the housing market for over a year now, meaning the market typically favors sellers over buyers. When in-damand houses enter the market, they tend not to stay there long; some sell within the week. This discourages first-time homebuyers, who want more time before committing to any given house. 

• Inability to generate a down payment. Many of the above points (including stagnant wage growth and student debt) result in the inability to generate a down payment. People in their 20s and 30s have yet to reach their prime earning years, and have also had less time to build up their savings. 

Fortunately, things are looking up for young homeowners. Mortgage lending is loosening up, as lenders approve people with lower credit scores and smaller down payments. As the job market continues to recover from the 2007-2008 crisis, incomes are expected to rise. However, this will likely not result in a housing "boom." Currently, many recent graduates are living with a parent (11 million in 2012, according to Pew Research Center). Instead, college graduates will slowly and steadily trickle out of their parents' homes and into the adult world.