Will the Millenials Save Housing?

More than any other generation in recent history, the Baby Boomers have impacted markets from wheat futures to housing, even today being the predominant force in housing. Along with an expanding economy and increased mortgage products, the Boomers’ family formation patterns fueled an unparalleled growth.

While not exactly dwarfing the Boomers’ estimated 77 million in number, along comes the Millennial Generation with 82 million members, with some estimates higher. They’ve got to have a positive effect, right? The answer is far less than clear.

Boomers are reaching retirement age. Millennials, however, are reaching just as important a milestone as they enter their thirties. An important Harvard University study says that the number of households will rise by 2.7 million as a result, driving new demand into housing markets. The extent to which this pressure will stir rental housing versus owner-occupied homes is uncertain and depends on three major factors: job and income growth, student loan debt, and mortgage availability.

The housing bust and the Great Recession disrupted traditional patterns of household formation, with a large number of young people moving in with their parents. Saddled with student loan debt and low-paying jobs, they had few alternatives. However, recent Census Bureau data suggests that the number of 18-to-24-year-olds living in multi-generational homes fell last year, a statistic which suggests an improving job market.

The first ten years of the 21st Century saw the share of households aged 25 to 34 with student loan debt climb to 39 percent, from 26 percent. Within that group, those with debt of $50,000 and up tripled to 16 percent. It’s also worth noting that not all young people with such debt actually graduated. Improving jobs and income will help over time, but the ongoing impact of this debt carries over into the mortgage market.

While overall lending criteria have recently relaxed a bit, they’re still strict by historical standards. Debt-to-income ratios at 43% are pretty much inflexible, and while interest rates are relatively low, high credit score standards keep many buyers—especially first-timers—out of the housing market.

It’s tempting to speculate that Millennials will prefer rental housing, but rents keep going up. The Harvard study as well as a recent article in The Atlantic, “America’s Looming Rental Crisis,” notes that renters are more cost burdened than owners, meaning they pay more than 28 percent of their incomes for housing. That means Millennials will be faced with the choice of an expensive and competitive rental market or an elusive home purchase.

Until the joint pressure of student loan debt and job and income growth deflates in a slowly-improving economy, whether they will choose renting or buying is unclear. What is clear, however is that the impact, whatever form it takes, will be significant.