Headwinds and societal shifts, such as declining marriage and fertility rates, have depressed homeownership levels among young adults. However, according to new research from Freddie Mac, the biggest barrier slowing young prospective buyers has been housing costs rising faster than incomes.
Freddie Mac’s June Insight examined economic and demographic trends from 2000 to 2016 to identify the causes behind the eight percent decrease in the homeownership rate among young adults (under age 35) since the rate’s peak in 2004.
Rising home costs and relatively stagnant income levels have proved to be the primary reason for the decline in young homeowners (49%), followed by lower marriage and fertility rates (22%), and a likely combination of student debt, a preference towards renting, borrowing constraints and other factors (13%). The younger, more racially diverse population (12%), and increased migration to more densely-populated metro areas, which tend to be more expensive (11%), have also suppressed homeownership.
“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,” said 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 of a hurdle for many would-be buyers to clear.”
Added Khater, “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 the market.”
The research also looked ahead to 2025 to estimate the homeownership rate among two age cohorts: those ages 25-34 in 2016, and those who will be of that age seven years from now. Under the baseline scenario, Freddie Mac estimates that homeownership rates in 2025 will increase for both cohorts as they age, but still remain below the historical average for their respective age groups.
“Demographics, housing preferences and economic conditions will all play a role in the direction of homeownership in coming years,” added Khater. “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.”
**Article via Economic Focus**