Future Homeownership Demand Prospects Remain Strong

Mike Sorohan msorohan@mba.org

July 10, 2018

First American Financial Corp., Santa Ana, Calif., said with "millions and millions" of Millennials ready to become homeowners, the only real question is: will the housing market have enough homes for them?

The company's annual Real Estate Sentiment Index survey of title agents and real estate professionals conducted in the second quarter of 2018 showed nearly 87 percent of first-time home buyers were in the prime home-buying age of 26 to 35, which corresponds with the ages of Millennials. Despite this encouraging demographic, First American Chief Economist Mark Fleming said the housing market continues to "underperform."

"The housing crisis brought an interesting change, as the homeownership rate exceeded the potential demand from 2008 to 2012," Fleming noted. "Speculation, easy access to credit and exuberance during the housing boom of 2004-2007 spurred the homeownership rate to record highs. As the housing market turned in 2008 and economic fundamentals supporting potential homeownership demand decreased in subsequent years, the homeownership rate exceeded potential homeownership demand, with the gap reaching almost 9 percent at its peak in 2010."

Fleming said this contrasts sharply with the dynamic observed in 2017, the most recent year of available data. In 2017, potential homeownership demand grew by 1 percent over the prior year, while the actual homeownership rate underperformed potential demand by nearly 9 percent.

Fleming noted Millennials are often referred to as a "renter generation," because they have prioritized furthering their education and thus delayed getting married and having children, which are critical lifestyle triggers to buying a first home. "However, the dream of homeownership is far from dead for this age group," he said, citing a Harvard University Joint Center for Housing Studies report showing nearly 80 percent of millennials who responded to a recent study by agreed that homeownership was part of achieving the American Dream.

"Millennials' lifestyle and economic decisions are some of the main reasons we currently have a lower homeownership rate than expected," Fleming said. "Yet, it is reasonable to expect homeownership rates to grow as millennials continue to make important decisions, including attaining an education and, later in life, getting married and buying a home. However, the question remains: as millions of millennials look to purchase their first homes, will the housing market provide enough homes for them?"

The report said homeownership is strongly correlated with marriage, and millennials are getting married later than earlier generations. The median age for a first marriage in 2016 was 27.4 for women and 29.5 for men--seven years more than the median ages in 1960. Additionally, the decision to have children also influences the decision to own; compared to households with no children, the homeownership rate is 5.4 percent higher for households with one or two children, and an additional percentage point higher for households with three or more children.

Other findings of the yearly report:

--Nationally, potential homeownership demand represented by the HPRI increased 1.1 percent in 2017 compared with 2016, based on changes in the underlying lifestyle, societal and economic data.

--Factors that increased potential homeownership demand included income growth (+0.30 percent) and rising educational attainment (+0.13 percent), which reflects the influence of millennial behavior on homeownership.

--The declining unemployment rate (+0.70 percent) also contributed to the rise in homeownership demand.

--Declines in the share of married households (-0.08 percent), the number of children per household (-0.05), and the increase in the 30-year, fixed-rate mortgage rate (-0.02 percent) were factors that decreased potential homeownership demand.

--Potential homeownership demand increased from 2016 to 2017 in 46 of the 50 metropolitan areas tracked by First American, as demographic and economic trends in these cities raised the likelihood of homeownership.

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