TREND WATCH: What’s Happening? In recent months, housing has emerged as the hottest industry in the U.S. economy. Housing permits and starts have surged, and NAR's Confidence Index is up. Many in the financial media are justifying this fresh optimism by declaring that Millennials are no longer putting their lives on hold. At last they are becoming a house-buying juggernaut. The floodgates have opened, and a generational wave of housing demand may be gathering momentum.
Our Take: Yes, home-building is recently up. But there is reason to doubt that Millennials are primarily responsible for this new activity or show signs of accelerating real-estate acquisition. Data from the Fed's new "Distributional Financial Accounts" show both Xers and Millennials lagging far behind older generations in their share of total real-estate ownership. They also show, more ominously, that even the dollar-value of total Millennial housing wealth has been trending down over the past two or three years. America's rising generation, it seems, is still slow to form households and is still reluctant to own rather than rent. If the Fed data are correct, we need to qualify any optimism about housing's long-term outlook.
Generational IMBALANCE: worse for housing than for total wealth
Consider this an update to our earlier story about generational differences in wealth ownership. (See "Trendspotting 12/16/19, Keyword: Wealth.") That earlier story looked, by generation, at ownership of all wealth (total net worth by household). This story, inspired by a recent WP article, looks just at real-estate wealth--value owned, not netting out mortgage liens on property.
Both charts draw from the same dataset, the Fed's new "Distributional Financial Accounts" (DFA) which I described in some detail back in June. (See "Trendspotting 6/10/19, Keyword: Households.") Both charts also make the same basic point, which is that Xers and Millennials are lagging far behind today's older generations, Boomers and Silent, in the share of wealth owned at any given age.
But the real-estate figures make the point even more dramatically. In 1990, when Boomers had reached an average age of 35, their share of total real estate assets was 31%--versus 19% for Gen-Xers in 2008 (when they were the same average age). Meanwhile, the 2019 share owned by Millennials, though their average age has not yet reached age 35 (that will happen in 2023) is only 4%. Now look at the exactly corresponding shares for total net worth: 21% for Boomers, 8% for Xers, and 5% for Millennials.
Take away: In total wealth, the Boomer share at age 35 exceeds the Millennial share at age 31 by four-to-one. But in real estate, it exceeds Millennials by eight-to-one.
Important: These Fed numbers on housing wealth may be flawed--for reasons I shall return to. But for the moment let's assume they're right. Let's ask ourselves the question: Why is there an even greater generational imbalance in real-estate ownership than in wealth ownership in general?
why are millennials falling so far behind in housing?
Well, as we all know, Millennials are putting off household formation by putting off getting married and having kids--which means they are more likely to move in with their parents or with each other. And even when they do set up independent households, they are more likely to rent than own. Though the homeownership rate under age 35 has ticked up from its all-time low in 2016, it still remains only half of what it was back in 2005. When it comes to other forms of asset acquisition (like DC pension wealth), on the other hand, Millennial savings are on par with or maybe even ahead of older generations at the same age.
So that explains why we might expect Millennials to be lagging most when it comes to real-estate ownership. But something else even more ominous may be going on as well. Gen-Xers and Millennials aren't just lagging Boomers and Silent in real-estate ownership shares, their shares have actually been declining over the last several years. The Gen-X share peaked in Q1 2015 at 25.3% and is now down to 23.8%. The Millennial share peaked in Q2 2016 at 7.5% and is now down to 4.0%. According to the Fed data, Millennial-owned real-estate assets have actually declined by over one third in nominal dollar value. These trends are not only counter-intuitive. They are almost incomprehensible. As they buy and hold more property, the value owned by younger generations should rise over time. Even the experts interviewed by the WP seem mystified by the dollar-value decline.
There are several possible explanations, more than one of which could be true. One possibility is that the Boomer and Silent generations tend to own the property that is appreciating the fastest (for example, in units in booming coastal urban cites). That seems plausible. Nothing benefits older generations more than NIMBY restrictions on new housing in America's hottest metro job markets.
Another possibility is that Xers and especially Millennials are leading the recent regional migration from urban to suburban and the ongoing geographic migrations from the west coast and northeast states to the Rockies and Sunbelt. (See "Trendspotting 10/07/19, Keyword: Cheaper.") In both cases, these are moves from high-cost housing to low-cost (and often low-tax) housing. All this is not only plausible. We know it is already happening. And the moves may be triggering housing tradedowns that result in less housing equity per household.
Two other possibilities apply just to Millennials. One is that, under age 35, falling rates of household formation are pushing down total household numbers as fast as the rising number of Millennials is pushing them up. Result: No significant rise in the number of Millennial homeowners even after the recent uptick in the under-35 homeownership rate. Another is that, among Millennial homebuyers, purchases by lower-income households are at last "catching up" with purchases by high-income households--which lowers the average home value per homeowner. I don't have data on this, but it seems plausible given recent economic trends.
It could be, of course, that the Fed data are simply off base. I have no problem believing that Xers and Millennials have been retrogressing for a few years in their real-estate ownership share. It's a lot harder to understand how Millennials could be suffering such a large dollar-value loss in their aggregate real-estate ownership. One troublesome fact is that the Fed's generational shares don't line up well with their age-bracket shares. Households under age 40, per the Fed, own roughly three times as much real estate as Millennial households in 2019. That makes no sense to me at all. (And yes, I've already reached out to my acquaintances at the Fed for answers. They are looking into the matter.)
But even if we go by age-bracket data and ignore generational membership, we still see a massive relative shift from young to old. This is "the graying of wealth."
implications for the future
This much we do know: If the Fed's generational data are anywhere close to accurate, the implications are sobering.
The data imply a simply stunning generational contrast in property ownership. On average, the Silent Generation owns $270K in real estate per member of that generation. For Boomers, the average is $200K. For Xers, $110K. And for Millennials, it's a mere $20K. (Remember: The great majority of Millennials still either rent or live with older people.) Alternatively, the 6.9% of the U.S. population over age 75 owns five times the total dollar value of real estate as the 20.5% of the U.S. population between ages 24 and 38 inclusive. And if you want to adjust for phase of life, consider what share of total U.S. real estate Millennials are likely to own by 2023--let's optimistically double today's share and call it 8%. Compare that, again, to the 31% owned by Boomers at the same age.
Since the numbers imply such an abysmal track record in acquiring real-estate wealth, they also imply that Millennials are dropping ever-further behind older generations in acquiring wealth in general. This constitutes a drag on the U.S. savings rate. It could eventually lead to increasingly risk-averse career behavior (since Millennials would not be able to tolerate any interruption in current income) and to extreme vulnerability in the event of disability or, further down the road, retirement.
Part of this is attitudinal: Millennials like to say they want to accumulate "experiences" rather than "things." But things provide economic security. Experiences don't. During the Great Depression, an important priority of the New Deal was to create a home-owning middle class that had a stake in the political order and would not be prey to radical collectivist dogmas. The New Deal succeeded in creating such a middle class for the next three or four generations. But Millennials are turning away from homeownership. And the political and social consequences of this turn are as yet unknown.
Finally--and most immediately--the numbers throw some doubt on all the recent optimism about Millennials "finally" buying homes. Jim Cramer says "the Millennial home-buying delay is over." Yes, housing permits and starts have exploded in the last few months. New home sales continue to trend higher. And presumably Millennials are a big driver behind this growth: According to the NAR, Millennials now account for 37% of all home buyers. We know they're certainly taking out a lot more mortgages since rates started to decline earlier this year.
On the other hand, we also know that the housing market is graying over time. The NAR reports that the average U.S. homebuyer is now age 47, up from age 31 in 1981 and up from age 39 as recently as 2010. Meanwhile, the median age of the first-time homebuyer has risen to age 33. (See "Trendspotting 10/07/19, Keyword: Roommates.") And while surely Millennials are year-over-year net buyers of homes, how much is the aggregate dollar value of their property failing to appreciate, either due to zero price gains or to trading down? After looking at the Fed DFA data, we need to ask these troubling questions.
