Americans in their 20s and early 30s are getting a nudge toward homeownership a decade after sales peaked during the housing bubble. It’s not their nagging parents. It’s rents. They’ve risen so much that buying is making more sense.
“I pay $1,410 in rent for my one-bedroom apartment in downtown Denver,” said Eric Arther, 28, who has saved about $30,000 for a down payment. “If I pay that much, I’d like to build some equity.”
Expect the open-house crowds to skew a little younger during this year’s spring homebuying season. Millennials made up 32 percent of the U.S. housing market in 2014, up from 28 percent two years earlier, and have pulled ahead of the older Generation X as the largest segment of buyers, according to the National Association of Realtors.
Purchases by younger buyers are likely to grow gradually as millennials work through hurdles such as student debt, lack of down-payment funds and later family formation than previous generations, according to Jed Kolko, chief economist for real estate website Trulia, a unit of Zillow Group Inc.
“We are at the beginning of a multiyear period where more young people become homeowners,” Kolko said in a telephone interview. “But I think it will happen more slowly than most people expect.”
First-time buyers made up 29 percent of existing-home sales in February, up from 28 percent in January and the first increase since November, the National Association of Realtors reported this week. The share of new buyers fell last year to its lowest level since 1987, according to the group.
About 5.2 million renters say they expect to purchase a house in 2015, up from 4.2 million a year earlier, a reflection of the improving economy, according to the Zillow Housing Confidence Index released this month. The share of renters aged 18 to 34 who want to buy grew in Atlanta, Chicago, Dallas, Detroit, Las Vegas, Minneapolis, Phoenix, San Francisco, Tampa and Washington, areas where job growth has been strong, according to the survey of 10,000 households in 20 cities.
While limited inventory, tight credit and down-payment requirements make it hard for many millennials to achieve the American Dream, soaring rents and the likelihood the Federal Reserve will increase interest rates later this year may drive more of them to explore buying, said Stan Humphries, chief economist at Seattle-based Zillow Group.
Humphries said he expects rent increases to outpace price gains by the end of the year as higher mortgage rates limit affordability and the rental market remains tight. The U.S. rental vacancy rate hit a 21-year low at the end of last year, according to the Census Bureau, giving landlords leverage to charge more.
“We’re seeing increased interest from renters in homeownership,” Humphries said. “That’s going to coincide, more than likely, with increasing mortgage rates as the Fed gets ready to probably increase the target rate this summer.”
The central bank said last week it would consider raising the benchmark rate as early as June and dropped from its statement a pledge that it would be “patient” on the timing of its first increase since 2006. The Fed’s stimulus has kept home-loan costs near historic lows.
Effective apartment rents, or what tenants paid after any landlord incentives, jumped 4.6 percent in the fourth quarter from a year earlier, a pace that will be repeated for the first quarter, according to Greg Willett, vice president of MPF Research, a Carrollton, Texas-based apartment-data firm. Leasing costs have climbed from a year earlier in every quarter since 2010, he said.
Demographics and the strength of the job market will probably be the biggest drivers of home sales for millennials, according to Willett. The unemployment rate for adults ages 25 to 34 fell to 5.4 percent in February from a high of 10.6 percent in October 2009, Labor Department figures show.
The U.S. has about 75 million millennials — people born from 1980 and 1995 — a cohort expected this year to surpass the baby boom generation in absolute numbers as immigrants swell the younger group and boomers die off, according to a January report by the Pew Research Center.
“We’re just now hitting the point that the oldest of millennials are in their early 30s, which would be about time for them to make those moves,” Willett said. “The question is, do they have money for a down payment?”
Young people are getting squeezed because the gap between rents and incomes is widening to an unsustainable level in many areas of the country, according to a study this month from the National Association of Realtors. In the past five years, the typical rent jumped 15 percent, while the income of renters increased by just 11 percent.
“Rents keep going up,” said Joe Atkins, a self-employed real estate broker overseeing 12 agents in Dallas who lease and sell residences. “A lot of my clients, it’s a better value play to buy than rent. If they can find something.”
The average mortgage cost 21 percent of average household income in the Dallas area in the fourth quarter, compared with 28.5 percent of income to rent, according to Zillow. The U.S. average was 21.4 percent to own, compared with 30.1 percent to rent.
Josh Griffith, 29, decided to buy in Dallas after watching prices for homes and rentals rise, and expecting an increase in borrowing costs. He made a down payment on a new $355,000 house where he plans to live with his wife, Amanda, when construction is completed late this year. Several friends are also buying in the Bishop Arts District, a neighborhood of boutiques, coffee shops and art galleries, he said.
“We’re all getting around 30,” Griffith, a strategic planning consultant for Southwest Airlines, said in a telephone interview. “We’re all advancing in our careers and earnings are going up and we all want to stay in the Dallas area. We’re getting married and kids are just a year or two away”
Sales are still subdued around the country as wages grow slowly. Previously owned homes, which make up about 90 percent of the market, sold at an annual pace of 4.88 million in February, less than the average of 5.27 million dating to 1999, according to the Realtors association.
Homebuilders have been waiting for pent-up demand to kick back in since construction started sliding in 2006. Purchases of new homes rose to a 539,000 annual pace in February, the most in seven years, the Commerce Department reported Tuesday. Earnings reports last week from Los Angeles-based KB Home and Miami-based Lennar Corp. pointed to stronger orders and growing confidence that buyers are finally returning.
Demand from first-time buyers is slowly getting back to normal, said Ara Hovnanian, chief executive officer of Red Bank, New Jersey-based homebuilder Hovnanian Enterprises Inc.
“A lot of people doubled up after the recession,” he said Wednesday in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “They went back home or rented with friends and they’re waiting for the right opportunity, waiting to qualify. Everything is going up, and that really helps the cause for buying homes.”
Arther, the Denver homebuyer, said that while more of his friends are considering purchases, the majority of them are being held back by mountains of student debt. In October, his lease will expire on his one-bedroom apartment on the 31st floor of a building that houses a Ritz-Carlton hotel.
“It’s super nice,” said Arther, who has a master’s in business administration from Colorado State University and works in the information technology department of DaVita Healthcare Partners Inc. “But it seems like the housing market is exploding in Denver so there’s a lot of opportunity there.”
It’s getting more expensive to live in Denver, for renters and buyers alike. Home values increased 14.7 percent in January from a year earlier, while the median rent rose 10.2 percent, compared with the nationwide average of 3.3 percent, data from Zillow show.
Arther said he’s been slow to jump into the sales market so far because he expects heavy competition. His budget is in line with Zillow’s median value for Denver of $286,000.
“There is less inventory in the traditional price range, where somebody is trying to buy their first home,” said Arther’s agent, Anthony Rael of RE/MAX Alliance. “They’re under $300,000 and it’s tough. If we doubled our inventory in that range tomorrow, it would be gone tomorrow.”