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Homeownership rate hits record low – Part II

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In just 3 months, the homeownership rate has fallen from 63.5 to 62.9%—the lowest it’s been in more than half a century, as we discussed in-depth in Part I of our series on this trend.

What’s causing the decline in homeownership, and who’s driving this trend? We’ve uncovered some surprising answers in the behaviors of three major demographics: Millennials, Gen Xers, and Baby Boomers.

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Is One Generation Causing the Decline in Homeownership?

Millennials

Many have blamed Millennials (born between the early 1980s and early 2000s) for the decline in the homeownership rate. Economists have cited student loan debt as one of the major deterrents keeping Millennials from buying homes. An analysis by LoanDepot, an independent mortgage lender, found that applicants who had monthly student loan payments of more than $300 were less likely to be approved for a mortgage than those with less student loan debt.

Others have said that the impact of student debt is overblown. A report by Goldman Sachs found that student debt only had a significant impact on home ownership when the borrower had more than $50,000 in debt or was making payments that exceeded 5% of their income—and the average borrower with an undergraduate degree has only $30,000 worth of debt.

A reasonable conclusion: Student loan debt is probably deterring some, but not all Millennials from buying a home.

Millennials are also the most educated generation yet, and most feel an obligation to put their expensive degrees to use before settling down. Owning a home hinders mobility, restricting job seekers to a single location. “It sometimes seems as if this group has given up on homeownership,” writes Derek Thompson for The Atlantic. “But it’s more accurate to say that they’ve merely hit the pause button on parenthood and mortgages.”

However, not everyone is swimming in student loan debt, and there are plenty of Millennials who would love to settle down and buy a home. So why don’t they?

They simply can’t afford to.

The bulk of Millennials are renters, and rents have jumped 20% over the past five years. Millennials who would otherwise be able to afford a mortgage cannot simultaneously save for a down payment while also paying the high cost of rent.

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Gen X

There has been little attention paid to the rise and fall of Gen X, born between 1965 and 1984. This is the generation that primarily drove the homeownership rate to peak levels back in 2004. They took advantage of easy-to-get mortgages to buy (often overpriced) homes. When the bubble burst, many Gen Xers wound up underwater on their mortgages.

“Generation X came into the market at precisely the wrong time,” explains Rick Sharga, Executive Vice President at Ten-X.com, an online real estate brokerage firm. “We’ve effectively wiped out a group of homeowners who historically would have been on their second or third properties by now.” Last year, the homeownership rate for 35- to 44-year-olds was 58.5%, a three-decade low, down from a historical average of 65.8% for this age group.

Once losing a home to short sale or foreclosure, it takes years to rebuild credit in order to buy a new home. It’s no wonder the number of renters aged 30 to 49 has climbed from 15 million to 18 million over the past decade.

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Baby Boomers

Depending on whom you ask, there are between 8,000 and 10,000 Baby Boomers (born between 1946 and 1964) reaching age 65 every day in America. Unfortunately, most Boomers didn’t save enough for retirement—which has forced some to sell their homes to finance their imminent post-work years.

Some are downgrading to smaller homes, but others are finding steep competition from younger generations, who are also in search of entry- and mid-level homes. One might think that Boomers would have the upper hand—they can just sell their McMansion and put it toward a more affordable house. The hiccup is that Millennials and Gen Xers don’t want to pay up for the large homes that Boomers are selling, which sharply deflates the value of these homes. It seems as though the recession is too fresh in everyone’s minds to consider extending beyond their means; and as a result, homebuyers are fighting for a limited inventory of more modest properties.

Instead of getting into this horse race, many Boomers are giving up homeownership altogether. In 2015, homeownership levels were down among all ages of the Boomer group, with the youngest Boomers (those aged 50-54) experiencing the biggest drop (-5.0%) compared to historical averages.

According to a study by Harvard University, the number of renter households for the 50+ crowd has jumped from 10 million to 15 million over the past decade, which accounts for more than half (56%) of the total renter growth. Some are opting for maintenance-free apartments. Others are headed straight to retirement communities.

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Housing Market Outlook

Millennials, whose rising rent costs and student loan payments prevent them from saving up for a home, will continue to boost the rental market. Over half of Millennials are still in their teens; so as they age, we can expect the number of new renter households to increase. Delays in marriage and parenthood, as well as the pursuit of higher education and career advancement, may also delay homeownership for this generation.

Burned by the housing crisis and its damaging impact on their credit scores, many Gen Xers are still unwilling or unable to buy a new home. Meanwhile, aging Baby Boomers with changing accessibility needs are making the move to rental housing and retirement communities.

Given these factors, it seems probable that the homeownership rate will continue to decline in all three demographics as rental demand grows even stronger. Stay tuned for updates in the coming months.

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Liked this post? Check out Part I for more information on homeownership trends in 2016.

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Amanda Maher

Amanda Maher

Amanda Maher is a self-proclaimed policy wonk who dabbles in real estate law. Amanda holds a B.S. in Political Science and Sociology from Boston University, as well as a Masters in Urban and Regional Policy from Northeastern.