For Now…
A recent press release from Zillow® sports a catchy, controversial title:
Baby Boomers and Millennials Are Competing for Homes, and Boomers Are Winning
Is that so? Either way, the headline unmistakably points to millennials and baby boomers, two of the biggest generations in U.S. history, as market movers.
Finally, Millennials’ Turn to Buy?
Millennials are more than 72 million strong. They now make up the bulk of U.S. adults. Born from 1981 to 1996, this group also presents the largest share of U.S. home buyers, the National Association of REALTORS® reports.
But many of these younger buyers may be steering clear of the most competitive markets, where they are losing out to boomer buyers. Why this might be?
After the housing crisis — a web in which many of their parents got entangled — it was the younger generations’ turn to buy. But because of that crisis, the rules have changed. Young people didn’t cause the mortgage default mess, but they now face strict approval criteria, under laws ostensibly passed to protect them.
Harder rules make it difficult for any potential home buyer to get a loan, of course. But they hit younger buyers as part of a double whammy. The younger generations aren’t only having to jump higher hurdles; many also run their financial lives in ways loan underwriters don’t understand.
Younger Buyers Approach Finance Differently
The growing bulk of today’s younger buyers approach work, income, and stability in new ways. They’re freelancing, working in the gig economy, running startups, creating things online, and relying on 1099 independent contractor income.
All of this can make a younger mortgage applicant feel like a square peg trying to fit into the round hole of a process built on W-2s and pay stubs, FICO scores, and traditional debt-to-income ratios. To a bank or a credit union, 1099 workers represent “unstable” income. In short, mortgage companies can be suspicious of their younger applicants’ promises to repay real estate loans.
But millions of non-traditional earners can and do repay their mortgages. The lending world is just now learning to assess the borrowing power of this population. It has to. And it will rely on artificial intelligence to guide future lending decisions.
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Different Strokes for Younger Folks
It’s well known that millennials and younger generations have not rushed to buy homes. They’ve been busy with other pursuits. By the time most millennials reached household formation age, they had attained a higher level of education than any prior U.S. generation.
Their achievements have not come cheaply. They’ve shouldered record amounts of student debt. What’s more, by the time Covid appeared on the scene, they were experiencing a serious, nationwide housing affordability challenge. Not all young buyers want the super-expensive houses that appear in so many of the listings.
There was a ray of hope for them. During the pandemic, the shift to remote and hybrid styles of working empowered them to live outside of the highly taxed, big-city hubs. So, they weren’t pressed to live in the priciest metro areas like Los Angeles, San Francisco, or New York City. At the top of their lists are smaller cities like Aspen and Austin, Buffalo and Salt Lake City.
The ones who do seek upscale real estate want to be sure it suits their own priorities. They want smart homes with solar roofs and electric vehicle chargers. This is already changing the residential market. As they mature and inherit wealth, millennials are poised to become increasingly influential in market trends.
Boomers Have a Lot More Up Their Sleeves
Older buyers have been sitting on growing pots of equity as their property values have skyrocketed. As we’ve noted, more boomers than millennials are in the position to make all-cash offers to win homes. Of course, many boomers have retired and no longer have W-2 income. Yet they do have income that lenders can understand: pensions and social security payments. Banks and credit unions also accept annuities and retirement account income as meeting loan approval criteria, as long as these payments are poised to keep coming for three years or more after the mortgage starts.
And that’s not all. They can also use their assets and securities to back real estate loans. This means the lender receives an interest in the borrower’s stocks and bonds or other assets, which it can claim if the borrower defaults.
Younger buyers, in contrast to boomers, may be new to the real estate market. They have not had as many years to own property and build equity. Without substantial cash, younger buyers may be unable to make all-cash offers in order to win bidding wars. And those bidding wars are expected to continue into 2022, according to predictions from Redfin — even though the market might cool off a little bit. This is why startups helping buyers make cash offers have become really big news.
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Fearless in Seattle: Millennials Find Their Bearings
The younger generation is buying up Seattle homes. By 2019, nearly 49% of Seattle homebuyers were younger buyers — people under 40. (People over age 60, reports Zillow, make up less than 20% of the Seattle buyer population.) So at least in Seattle, the millennials could well be winning the contest.
Seattle is an expanding tech hub, which likely explains its strong appeal to younger buyers. And tech professionals make $158,000 per year on average. Their relatively high and steady salaries enable them to borrow. As Alec Regimbal writes for SeattlePI.com: “Millennials earning large tech salaries can afford to compete with boomers in a way that many of their counterparts across the U.S. can’t.”
So, what’s next for the younger generations? Is their success in Seattle the shape of things to come?
Maybe, but don’t expect 2022 to be a slam-dunk year for young buyers. The Home Buying Institute quotes home building economist Ali Wolf, who forecasts a level of demand that will keep outstripping supply: “Entry-level home supply in particular will remain extremely constrained.”
For many young homeowners-to-be, the struggle continues.
Supporting References
Zillow, via PR Newswire: Baby Boomers and Millennials Are Competing for Homes, and Boomers Are Winning (Oct. 14, 2021).
Mortgage Bankers Association, via MBA NewsLink: When Baby Boomers, Millennials Compete for Homes, Boomers Usually Win (Oct. 14, 2021).
Alec Regimbal for SeattlePI.com (formerly the Seattle Post-Intelligencer): Boomers Vs. Millennials: Who’s Winning in the Fight to Buy a House in Seattle? (Oct. 27, 2021).
Richard Fry for Pew Research Center: Fact Tank – Millennials Overtake Baby Boomers as America’s Largest Generation (Apr. 28, 2020).
National Association of REALTORS® News Release: 2021 Home Buyers and Sellers Generational Trends Report.
Jacqueline Davalos for Bloomberg L.P. via the Chicago Tribune: Millennials Are Changing the Luxury Real Estate Market (Feb. 1, 2021).
RocketMortgage.com: How Lenders View Retirement Income (Oct. 26, 2021).
Photo credits: Mart Production and Eric Froehling.