Although home sales have been high, millennial home buyers in the market are having a tough time with affordability
By Ali Wolf
Demographic tailwinds are a key reason to be bullish about future housing demand, and no group is more important than the millennials. Millennials, defined in this piece as those born between 1980 and 2000, represent a large generation that span different ages, lifestages, incomes and preferences. Understanding this cohort is vital for determining housing demand. Zonda’s economics team has surveyed* millennials for the past five years and provides the findings from the latest report below.
The age distribution of millennials is most concentrated at 30 and 31 years old. This is an important note because, according to the wedding website, The Knot, the average age for marriage in 2020 was 32. Marriage and homeownership often go hand-in-hand.
The ability to buy a home, however, ultimately comes down to one thing: money. Four of the top five reasons millennials are still renting are related to affordability, led by the inability to afford a home, no down payment and student loan debt. In fact, the homeownership rate today for those under 35 (38.1%) is notably below where it was 20 years ago (40.5%) and under the 30-year historical average.
A silver lining of the pandemic is that the finances for many in this generation either stayed the same or improved over the past year. For example, 42% of the millennials surveyed by Zonda reported that their income increased compared to last year, with an additional 36% citing no change. Furthermore, 60% of millennials said they saved more money in 2020 compared to 2019. The savings happened for many reasons, including a change of habits because of the pandemic, stimulus checks and student loan forbearance.
Millennials reported that continuing to save as much money as possible was their top priority. Following in a close second, however, was using their savings for a down payment on a home. From our survey: 17% of millennials are planning to buy a home over the next 1-3 years. We recognize that there is likely a difference between intent and reality though. An additional 27% are unsure when they are going to buy. Only 7% said they plan on never owning.
While many millennials reported improved finances over the past year, 15% of those surveyed said that their newfound savings isn’t enough to buy a home yet.
Millennials in the housing market
It’s important for builders, especially on the sales and marketing side, to understand why millennials are buying in the first place. Below are the top five reasons millennial homeowners cited for their purchase. Note: it’s a mix of personal and financial reasons: Customization: I wanted the ability to make somewhere mine; Put down roots: Stability and settling down; Housing as an investment: Appreciation/rising home values; Math: It was cheaper for me to own than rent; and Pay to yourself: Sick of paying rent.
Of the millennial homeowners survey by Zonda, the majority live in a home under 2,000 square feet. The sweet spot for affordability and livability appears to be between 1,000 and 1,999 square feet, with 57% of millennials reporting their home falls within that range. 26% of millennials report living in a home between 2,000 and 2,999 square feet.
When it comes down to what matters most in the home, both homeowners and renters reported that a large kitchen was of the utmost importance. A large kitchen ranks almost two times above the second-most reported answer, a garage. A functional backyard with space for socializing landed as the third highest priority in the home.
Millennials are among the most mobile cohort given the propensity to rent, flexibility that comes with either no kids or young kids and a greater willingness to change jobs. Even before the pandemic, 41% of millennials were seriously considering leaving their current city. The COVID-19 pandemic started a period we are calling “migration mania,” where an additional 8% of millennials reported seriously considering leaving their current city and 6% actually moved over the past year.
The top three reasons to consider moving were virtually identical across the age groups, led by a search for more affordable housing, followed by better employment opportunities and finding a home with a bigger yard. The only exception among the millennial age buckets came from those that were 21 to 26 who said that their second biggest reason they were considering moving was to be closer to family.
A noteworthy shift in the migration trends is that those aged 27 to 36 were the most likely to move before the pandemic. Since the pandemic started, the age group shifted; now the 37-41 year olds report the most interest in moving. The latter group is more likely to be existing homeowners compared to those younger in the cohort. The shift matches what we’ve seen on the builder side, where move-up buyers are the most active shoppers today followed by first-time buyers.
Affordability concerns permeated the survey ranging from the ability to own to where people live.
For the fifth year running, most millennials reported living 11-30 minutes from work. We classify this as “close-in suburbs.” Additionally, and unsurprisingly, the latest data captures the work-from-home trend. 45% of our respondents reported working from home over the past year, up substantially from the 11% pre-pandemic. 18% of those that are working from home reported that they are doing so because of the pandemic and expect to fully return to the office upon full reopening. 14% of those working from home reporting they are doing so because of the pandemic and do not plan to fully return to the office. This group should be of most interest to the homebuilding industry.
The demographic tailwinds that were driving housing before the pandemic have only been exaggerated over the past year. With a larger number of millennials working from home, looking to move, and interested in buying a home in the near future, there are reasons to be optimistic about demand. Hearing directly from millennials, however, surfaces a lingering issue: affordability. Affordability concerns permeated the survey ranging from the ability to own to where people live. As we plan for the demographic-driven demand, we need to stay focused on identifying the right product for a rising mortgage rate and price environment.
* The results from this survey cover answers from roughly 1,000 respondents across the United States received between November 2020 and April 2021
Ali Wolf is the chief economist at Zonda.