Real Estate Reality Check Keeps Them Renting

Housing analysts around the United States have been paying an extraordinary amount of attention to the housing wants and needs of the Millennial generation for one simple reason: there are so many of them! The Millennials are generally defined as those born between the years 1980 and 2000. As of 2013 there were 87 million residents of the U.S. who were in the age 15-34 bracket, which roughly corresponds with this time frame. The Millennials are finally overtaking the Baby Boomer generation in terms of sheer size; as of 2013 there were about 83 million Boomers living in the U.S., according to the U.S. Census Bureau. 

With the oldest Millennials now well into their thirties, millions of young Americans are reaching the time in their lives when prior generations typically purchased their first homes. Numerous surveys have documented that the percentage of Millennials who want to own homes is no different from prior generations. In practice, however, today’s young adults are far less likely to buy homes than those from 10 or 20 years ago.
Millennials have many good reasons for resisting their first home purchases. Some of these factors were documented in a recent research piece by John Burns Real Estate Consulting (JBREC) entitled, “Inside the Mind of a Millennial.” These include:
* Lack of financial security—Compared with prior generations, Millennials tend to earn less, carry a lot more debt (particularly from student loans) and have far less savings for down payments.
* Later household formation—The average marriage age today is six years higher than it was in the 1960s, which delays the typical age of home buying. Additionally, 15 percent of young adults age 25-34 still live with their parents.
* Different priorities—Millennials want to travel, spend time with friends and take advantage of amenity-rich apartment buildings, factors that all diminish their desire to purchase homes
* A mismatch between desire and reality—A majority of Millennials want to live in newer units in desirable urban locations. The prohibitively high cost of such units puts them out of reach for younger prospective buyers. As a result, about half of Millennials report that they simply cannot find a home they want to buy within their budgets.

"The Millennials are finally overtaking the Baby Boomer generation in terms of sheer size."

All of these factors have combined to have a dramatic effect on the housing market: the National Association of Realtors® reported that only 33 percent of homes sold in 2014 were to first-time buyers, representing the smallest share since 1987. In a high-cost area such as Northern Virginia, the problem is magnified.

WHAT CAN A TYPICAL MILLENNIAL FAMILY AFFORD?
For the purposes of this analysis, let’s define a “typical Millennial family” as a three-person household with two adults between the ages of 25 and 34, and one young child. As of 2013, the median income for all three-person households in the Washington metro area, as reported by the American Community Survey, was $107,147. That year, Bureau of Labor Statistics data reveals that the median earnings for a U.S. worker age 25-34 was 14 percent below the overall national median earnings level for all workers age 25 or older. Assuming that workers age 25-34 in the D.C. region earn 14 percent less than all workers, the median household income for a typical Millennial family in the area would be about $92,000.

As discussed in a prior review of regional housing affordability (“Housing Budget Busters: A Closer Look at Northern Virginia Housing Affordability,” RE+VIEW, Jan-Feb 2015, page 16), the standard ratio of income to an affordable purchase price is 28 percent. Using this benchmark for affordability, a typical Millennial family in this region could expect to afford a home with a price tag of about $329,000.

Taking a look around the region at active MRIS listings as of March 2015, there were 39 listings with at least two bedrooms with asking prices between $325,000 and $335,000.

Here is a sampling of these listings:

While there are certainly options out there for the typical Millennial family to purchase a home in Northern Virginia, units available in their optimal price range tend to be older, smaller, and/or located far from employment/urban centers than the optimal unit that younger buyers would like to find. For example the JBREC survey contained the startling figure that 73 percent of Millennials want to live within walking or biking distance from a “village square” with shops and restaurants. The only unit among the five profiled above that is in proximity to such amenities is a condominium in a 40-year old building near Columbia Pike in South Arlington. The others are all located in more auto-oriented and/or isolated environments.

WHAT DOES THIS MEAN FOR MILLENIALS?
At first blush the prospect of buying a home in Northern Virginia may seem unpleasant to today’s younger buyers. For most such would-be buyers there are simply very few units available in their price range, and there are virtually none that meet all of their stated desires. The alternative to buying is, of course, to continue renting. In the first half of 2015, with a large supply of new rental units expected to hit the market, renters are not likely to see major rent increases. However, the pipeline for new apartment construction is set to slow down, which should result in a resumption of rental increases.

"While there are certainly options out there for the typical Millennial family to purchase a home in Northern Virginia, units available in their optimal price range tend to be older, smaller, and/or located far from employment/urban centers than the optimal unit that younger buyers would like to find."

As rents begin to increase, many Millennials are likely to consider purchasing their first homes. It is not too early for enterprising Realtors® to begin cultivating these clients and making the case to them that buying a home will be a far better choice in the long run than renting. Based on a 2013 analysis of the payback period for buying versus renting (“Is It Time to Say Good-‘Buy’ Lease,” RE+VIEW, Jul-Aug 2013, page 24), it would only take three to four years for an investment in a home in Northern Virginia to pay for itself. With interest rates expected to begin rising later in 2015, the payback period will increase, so it is important to reach prospective buyers now before this happens.

Another opportunity for Realtors® to connect with Millennial buyers is the 3 percent Down Payment Assistance Grant just announced by the Virginia Housing Development Authority . This program provides a grant for up to 3 percent of the total purchase price for qualifying first-time homebuyers in Virginia. The maximum income for a three-person household in Northern Virginia is $113,840, well above the income of our “typical” family. This program is only active until June 30, 2015, so Realtors® and their clients must act quickly in order to take advantage of it.

David Versel is a Senior Research Associate with the George Mason University Center for Regional Analysis.