The rising cost of housing is the biggest hurdle for young prospective buyers to overcome, according to new research from Freddie Mac. Home prices are rising faster than incomes, and the lag in young adult homeownership rates will likely continue until 2025, Freddie Mac notes.
The homeownership rate among those under the age of 35 has fallen 8 percent since reaching a peak in 2004. Freddie Mac’s analysis reveals that higher rents and home prices are the primary reason for the decline in young homeowners (49 percent), followed by lower marriage and fertility rates (22 percent), and a likely combination of student debt, a preference toward renting, borrowing constraints and other factors (13 percent).
“Historically low mortgage rates and increasingly favorable employment conditions should have generated a far greater number of home purchases by young adults, especially in the last five years,” says Sam Khater, Freddie Mac’s chief economist. “Unfortunately, home price and rent growth above incomes—driven primarily by a severe shortage of housing supply—have been too high a hurdle for many would-be buyers to clear. At a time when rising home values continue to build housing wealth for most homeowners, these weaker affordability conditions have led to a missed opportunity for the interested young buyers who are unfortunately priced out of market.”
Homeownership rates for younger age groups—between 25 and 34 years old—have fallen significantly since the financial crisis and likely will continue until 2025, researchers note. Freddie Mac estimates homeownership rates will increase for those between the ages of 25 to 34 seven years from now in 2025. However, those currently in that age group and those who will be in that age segment in 2025 will remain below historical averages for homeownership, researchers forecast. For those who will be 25-34 years old in 2025, the forecasted homeownership rate is 36.6 percent.
“Demographics, housing preferences, and economic conditions will all play a role in the direction of homeownership in coming years,” Khater says. “If economic conditions improve, and incomes and entry-level housing supply increase in a meaningful way, homeownership rates for today and tomorrow’s young adults could exceed our current projections.”
Some additional highlights from the survey:
- About 700,000 young adults did not buy a home between 2000 and 2016 because of increases in inflation-adjusted home prices and rents.
- The home price-to-income ratio has risen significantly since 2000, depressing homeownership. The ratio has increased more for young adults than the overall population, and particularly for young adults living in metro areas.
- The homeownership rate for young adults (ages 25-34 in 2016) is forecast to increase as they age, but the increase will vary. By 2025 Freddie Mac projects the following under these scenarios:
- Under a baseline scenario, the homeownership rate of young adults rises to 58.1 percent.
- Under an optimistic scenario, the homeownership rate could increase up to 60 percent—1.9 percentage points higher than the baseline.
- In a pessimistic scenario, the homeownership rate increases only to 55.9 percent—2.2 percentage points less than baseline.
Source:
“Rising Housing Costs Cited as Root Cause of Lagging Homeownership Rate Among Young Adults,” Freddie Mac (June 28, 2018)
