The “American dream” of owning a home has never seemed further out of reach for young people. You can hardly blame Gen Z and younger millennials for adopting an economic nihilism that prioritizes the here and now — whether that is US$400 Lola blankets or risky crypto trading — over stashing money away for a down payment.
However, there is an underappreciated cost to this shift in behavior. A recent study by economists at the University of Chicago and Northwestern University in Evanston, Illinois, highlighted something I have long suspected: Dimming prospects for homeownership push households to consume more and make riskier investments. The authors also found evidence of lower effort at work.
Such choices, the researchers say, produce “substantially greater wealth dispersion between those who retain hope of homeownership and those who give up.”
Like previous generations, most young people are going to end up owning homes. The housing market is in transition and despite the current lack of affordability, there is compelling evidence that we are grinding back toward more normal levels. The only question is whether this adjustment will be fast and disruptive or slow and steady.
Today’s disgruntled young people should prepare for the coming change even while bemoaning the current affordability challenges.
Resale housing inventory has climbed toward or above levels of before the COVID-19 pandemic in most of the US south and west. Even in the supply-constrained northeast and midwest, there are signs of inventory growth. By 2027 — the year in which the oldest members of Gen Z start turning 30 — the US will probably have more existing homes for sale than it has had in a decade.
This normalization is putting gradual but persistent pressure on prices. At a metro level, price growth is either decelerating or prices are outright falling just about everywhere. A surge in delistings heading into year-end indicates that market dynamics are weaker than advertised home prices suggest. The S&P Cotality Case-Shiller US National Home Price Index rose just 1.3 percent in September from a year earlier, well below the 3.7 percent growth in the average hourly earnings of American workers.
Longer-term, Gen Z will benefit from a coming demographic shift, too. The oldest baby boomers are now turning 80, the age at which homeownership rates start to decline, to say nothing of the inevitability of actuarial tables. Mortgage giant Freddie Mac estimates that the number of boomer-homeowning households declined by 400,000 this year. By 2030, that decline will exceed 800,000 a year. By then, members of Gen Z, along with younger millennials, will be in their prime first-time-homebuying years.
Admittedly, the vibes around housing and affordability are bad today, but we have been here before.
In the early 2010s, it was millennials who were struggling economically and disillusioned with homeownership, albeit for different reasons. Back then, the unemployment rate for 25-to-29-year-olds was north of 10 percent, nearly double what it is today. Good jobs were hard to get and concentrated in cities, where homes are always out of reach for young people. It was hard to save a down payment in the wake of the 2008 great recession, and many parents had been too devastated financially to offer help.
Even for those who could buy, the price collapse in the late 2000s and a shaky labor market meant that tying oneself to a house was not necessarily a wise career or financial move.
In the ensuing decade-and-a-half, the majority of those millennials did buy homes — the homeownership rate for 40-to-44-year-olds last year was 65.8 percent, according to the US Census Bureau.
The outlook for Gen Z over the next 10 to 15 years is even better. Starting affordability is worse, sure, but baby boomers were a headwind for millennials, whereas they are a tailwind for Gen Z. Additionally, politicians across parties are talking about making housing more abundant and affordable, so much so that Lennar Corp, the second-largest US homebuilder, pointed to “government action” as an important factor for the market next year.
Gen Z also has time on its side. Even in the 1990s, perhaps the best time ever to buy a home, the homeownership rate of 25-to-29-year-olds was about 35 percent. With each generation delaying adult milestones, buying a home in your early 30s seems reasonable now. There is a pretty good chance that the US will be back at tolerable levels of affordability once Gen-Zers reach that age.
So, people in their 20s pessimistic about buying into the American dream should cheer up. Their time will come — and perhaps they should pull some money out of crypto to start saving for that down payment.
Conor Sen is a Bloomberg Opinion columnist. He is the founder of Peachtree Creek Investments. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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