Across America millennials face a crisis of home ownership. The American population born after 1989 are more likely to live with their parents, not just immediately after college but long into their twenties. With house prices on the rise, forming your own home early in life is a pipe dream for most. From 1997 to 2007, roughly 1.2 million households were being formed on a yearly basis. Since then, that number has halved to 600,000.
The reasons for this crisis are deeply ingrained in the post-recession psyche of America. Easy credit and a booming housing market saw the first quarter of 2005 sustain a homeownership rate of 69.1 per cent. The post-recession controls on subprime mortgages and reluctance of most banks to engage in high-risk loans has seen this rate plummet. It is now at its lowest level since 1989.
The financial crisis not only crippled millennials’ access to cheap credit, but changed their attitude towards risk. Millennials are scarred from the financial meltdown that hit their parents, many of whom were forced into foreclosure as a result of living in homes they could not afford. As millennials attempted to grab a hold on the job ladder in one of the worst markets since the Great Depression, they were simultaneously observing their parents’ struggle to build a nest egg and pay off their mortgage. The consequence has been a youth unwilling to take financial risks and more distrustful of financial advice. A recent TIAA-CREF survey found that 60 per cent of young people did not know who to trust for financial advice.
This matters. Minimal investing experience makes millennials less confident and less happy about buying a home. It is hard to accumulate wealth when young Americans are just not exposing themselves to traditional investment vehicles like stocks that helped previous generations garner wealth and get the keys to their first home.
There are other psychological factors at play. Few young people would say they ‘want’ to live at their parent’s home after college, yet there is evidence to suggest that the modern family home is more inclusive and contains stronger bonds than in previous generations. Recent studies have shown that millennials living at home are just as satisfied with their lives as those not living at home. Millennials who stay at home late into life are increasingly placing a premium not only on the savings they accrue, but also on the family ties they have forged.
Young people today still aspire to get married, just as their parents’ generation did. The financial constraints and economic backlash from the global recession, however, prevents many from tying the knot. The caveat these days is that larger numbers of young men are unemployed and women are increasingly the breadwinners. In 1960, 93 per cent of all males aged 25 to 34 were a part of the labour force. In 2012, this number dipped to 82 per cent. As a result, there are relatively fewer men who are both single and employed for women to marry. The confluence of these factors leads women to view marriage as more costly and establishing a home less of a priority.
Looming in the backdrop with these factors is a mountain of student debt. Today’s students have accumulated more than one trillion dollars of outstanding student debt. By any reasonable account, this has had a negative effect on the likelihood of owning a home, not least because it is wrecking the credit scores of students who struggle to pay back their loans on time. Seeing their credit scores deteriorate is a strong headwind against putting a down payment on a home.
The economics are against young people today. Homes are more expensive, mortgages less accessible and credit less available. Yet we cannot dismiss that young people are less willing to take on the risks necessary to owning their first home.
It comes as no surprise that a generation that was scarred by seeing the economic malaise hit their parents so hard has less issue with the stigma of living at home after college. The millennial generation is a transformative one, having witnessed one of worst financial recessions in US history while hoping to find their place in an extremely tight labor market.
Part of this transformation has been the decline in young adults’ willingness to invest in buying a home. A general sense of distrust combined with demographic shifts has fueled this decline for our nation’s 18 to 29 year-olds. Equally transformative is that millennials are welcome with waiting to own, suggesting that this group is more likely to think deeply about their personal finances before dipping their toes into homeownership.
- This post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
- Featured image credit: Evgeniy Isaev CC-BY-2.0
Hugo Winn is a communications and policy expert with experience in London and Washington DC. He is an advisor to a number of progressive campaigns including the UN Women HeForShe campaign. He is Chief Editor of the European Youth Parliament and a US-UK Young Leader under 30. He is an alumni of LSE and writes for Huffington Post, CapX and NewStatesman.
Alex Verkhivker is a contributor to Capital Ideas at The University of Chicago Booth School of Business. He has previously worked as an economic researcher with the Federal Trade Commission in Washington and as an Associate Economist at the Federal Reserve Bank of Chicago. He has written for the Becker Friedman Institute For Research In Economics at The University of Chicago, The United Kingdom Centre for Policy Studies CapX, Forbes, Huffington Post, Washington Examiner, The Times of Northwest Indiana and Economics 21 – the economics portal of the Manhattan Institute for Policy Research. Alex holds degrees in economics and management from The University of Chicago and UCLA, respectively. You can follow him on twitter @averkh.