One of the drivers behind our slow housing recovery is an absence of a large portion of the buying audience: young, first-time buyers. Given mortgage rates and home prices, why aren’t more young people buying a home in this affordable marketplace?
To find out why and to learn more about what can be done to attract more of this audience, we interviewed Mitchell Fillet, professor of business and finance at Fordham University and John Glascock, director of the Center for Real Estate at the University of Connecticut.
A: Homeownership is a wonderful thing, but it can actually become an almost irrational activity as people turn away from the far less risky process of renting to pursue homeownership. This is propelled by the strong belief that, over a long period of time -- say 10 to 20 years -- owning a home will be a great financial investment with a highly positive financial impact. Unfortunately, the rules have changed.
Years ago, homebuyers used to be required to have real savings and sufficient predictable cash flow to satisfy a lender. Then we figured out that lenders and intermediaries can make a ton of money by lending to people who may not have real savings, may not have predictable, long-term, job-based cash flow and whose home may actually go down in value. No surprise there. One only needs to look at the period from 1989 to 1995 or, more poetically, from 2008 to 2012.
Young Americans still favor homebuying
That being said, young people are still in favor of purchasing a home. The issue is that there are far fewer younger buyers in today’s market than there were post-war baby boomers. At this moment, borrowers have to have substantial savings, long-term job income, a sizeable down payment and limited debt loads. Luckily for our economy, there are many young people who can purchase a home given the reality of the current market. That is in part due to the lower cost of homes today.
Thinking about homes a little differently
The main effect of the last five years has been a heavy dose of reality that creates awareness in two areas:
- The cost of the house, which translates into size of the home
- The carrying costs of the home, which also translates into the size of the home
What do younger buyers want? Buyers are coming to the closing table with large amounts of cash but they are purchasing smaller homes on smaller lots. Suddenly, townhomes in developments are a very acceptable alternative. Let someone else plow the streets, clean the pool and sweep the tennis courts.
We are sorting through the recent upheaval in the mortgage industry and are creating housing that young people can actually afford to purchase and, more importantly, afford to live in for an extended period of time without all of the stress of the last few years.
A: I don’t see that there are real financial hurdles for young couples who wish to purchase homes today. The reason young people are not buying homes right now is an issue of demographics, not one of finances.
Homeownership is something people usually consider only after they have children, but the typical female college graduate does not get married now until she is approximately 31 to 33 years old. That means a first house is likely to come into the picture when couples are between 33 and 35. If they do buy earlier, they tend to purchase condominiums which are smaller and may be easier to sell.
Preferences of the younger generation
Today, college grads are opting to live in the city where job opportunities are better and they can work to save up for a down payment. Older generations didn’t have as much saved up when they went to purchase their first house, so they opted for a small starter home. Not so with the younger generation. When they are ready to purchase, they tend to buy larger properties and avoid fixer-uppers because they don’t want the hassle. They are also having fewer children than previous generations, and that offers a wealth effect as well.
Kids influence buying decisions
Even Ed Glaeser, in his book “Triumph of the City,” says that he went to the suburbs because of his kids. We all do! Only those wealthy enough can stay in the city and pay for private schools.
The current group of young and educated couples will likely choose life in a city until they decide to have kids. This is because jobs are generally better in the city and both need to work and only cities tend to offer that kind of opportunity. So if people decide to get married later, that will push the younger generation toward cities that offer good employment for both.
No real issue for young buyers
Given that housing is very affordable in most cities and states, it’s hard for me as an economist to see the problem for most young couples. We have many more social issues that I'd prefer to spend tax dollars on (even if it required a tax increase) over trying to help young American buy homes.