Millennials Are Finally Buying Homes: Here’s How It’s Affecting the Economy

For many years, the millennial generation was an outlier in homebuying trends, buying fewer homes and later in life than older generations. One study from 2016 showed that for millennials under 35, homeownership rates were 21.2 percent lower than usual; while homeownership rates were lower-than-average for all generations, millennials were far above the average decline of 9.1 percent.

Now, millennials are starting to flock to homes in droves. According to a report from the National Association of Realtors, one-third of all purchases made in 2017 were made by millennials, despite low housing inventory and relatively high market prices.

So why is this change finally happening, and how could it affect the economy at large?

Why This Is Happening

There are several factors responsible for the somewhat sudden change in millennial homebuying activity:

  • More mortgage options. Over the past several years, there’s been an increase in the number of home buying options available to consumers, regardless of previous credit standing or current financial status. Today you can find mortgage lenders who offer loans with low or no down payment. These loans are ideal for millennial homebuyers having trouble saving up for a down payment.
  • Employment. Part of the reason millennials resorted to renting for so long is the brutal employment market that existed in the wake of the economic crisis of 2008. Now, the economy has been recovering strongly for nearly a decade, and the unemployment rate is at a near-historic low of 4.1 percent. There are consistent gains in many industries, including construction, manufacturing, and healthcare, and wages are starting to grow as well. That’s leading to a significant increase in household wealth, which is putting more money in millennials’ pockets and is circulating more confidence in the economy overall.
  • Interest incentives. The Federal Reserve has announced its intentions to steadily increase interest rates over the next several years, now that the economy is growing healthily and the worst parts of the economic crisis are over. Mortgage rates have been exceptional for the last several years, but now that interest rates are rising, they’re poised to rise as well. This creates an incentive for hesitant prospective homebuyers to take action now-otherwise, they may face higher interest rates on their loans.
  • Rising rents. The attractive alternative for millennials has long been reasonable rent prices, which in many cases, were favorable over the cost of a mortgage and home maintenance. However, rent prices have been climbing steadily, and may have finally topped out in many major cities. Owning a home is now favorable to renting, even for entry-level domiciles, and millennials are starting to realize it.

How the Economy Will Change

What impact could this have on the economy at large?

  • Consumer confidence. The spike in millennial home purchases may be an indication of increasing consumer confidence, which has grown steadily since its lowest point in the wake of the 2008 economic crisis. Consumer confidence, of course, affects the economy in many ways, increasing total amount of consumer spending, driving stock prices higher, increasing total wealth, and continuing the cycle indefinitely until something comes along to break it. This total increase in wealth could lead to a period of economic prosperity, so long as those homebuying trends continue and millennials feel comfortable in their positions.
  • Rent reactions. All economic systems respond to supply and demand. Now that more millennials are moving from their rent-based apartments to homes, demand for rentals will decrease. Accordingly, landlords might stop increasing rent prices, or actively decrease them in an effort to attract more tenants. The one variable possibly preventing this is the segment of millennials who may rent indefinitely-creating a steady supply of tenants for landlords.
  • The housing market. The increased interest from millennials (and older generations) will almost certainly impact the housing market. Demand will increase and supply will decrease as more prospective homebuyers emerge, limiting the housing inventory available for new buyers and driving home prices up. Existing homebuyers may be incentivized to sell, and will benefit from an increase in wealth, which may drive consumer spending and economic activity even further.

The increase in millennial homebuying activity is both a product of and a predictor of economic strength. Young adults are finding it easier now to make a first-time home purchase, and overall home purchases have skyrocketed since the economic recession. Expect this trend to continue as the economy continues to pick up speed.