What’s Next for the Millennial Market?

By Carmen Hirciag

As the second largest generation behind baby boomers, millennials may be a force to be reckoned with, but they also may be known as the generation unable to afford a home. Born between the early 1980s and early 2000s and more than 74 million strong, they make up nearly 24 percent of the U.S. population. In California, they comprise more than 25 percent of the population— more than 9.6 million people, according to the U.S. Census Bureau. Millennials are well educated—46 percent of 27- to 34-year olds have a college degree, and 42 percent of 18- to 26-year olds are currently enrolled in a college. However, despite being well educated, millennials have some catching up to do in terms of earnings and employment. Only about half of millennials are currently employed. Of those who are employed, only one-third have a full-time job, which does not bode well for their present homeownership prospects. The challenging employment situation has led to more millennials returning to their parents’ houses and delaying homeownership. These combined factors have all resulted in a decline in household formation.

Having graduated from college in the aftermath of the Great Recession—the worst recession in the U.S. since the Great Depression—millennials’ job prospects and future earnings potential have been limited since the start of their careers. Despite the societal norms of previous generations, going to college no longer guarantees the ability to obtain a good job—one of the key factors in one’s ability to become a homeowner. According to the CALIFORNIA ASSOCIATION OF REALTORS®’ 2014 Millennials Survey, 33 percent of millennials in California have full-time employment, 19 percent have a part-time job, 24 percent are students, and 20 percent are unemployed. These weak job numbers translate to a median annual income of $35,000. Low annual wages are a major hindrance in this generation’s ability to purchase a home, which has resulted in them “boomeranging” back to their parents’ homes. Recent data shows that parental coresidence rate among 25-year olds across the United States has risen dramatically since 2003. In 2002-2003 the majority of states had a parental co-residence rate below 30 percent. Fast forward 10 years to 2012-2013, and that picture changes drastically, with nearly all states having co-residence rates of more than 30 percent. In California, 36 percent of millennials live with their parents. Meanwhile, the homeownership rate for 25- and 30-year olds declined approximately 10 percent and student debt doubled from nearly $15,000 to $30,000. The Federal Reserve Bank of New York’s 2014 Staff Report, “Debt, Job, or Housing: What’s Keeping Millennials at Home?” found a positive correlation between student loan debt growth and the co-residence rate of young adults. An overlooked factor in millennials delaying household formation is demographics. Millennials are very diverse—62 percent are minorities. It is not uncommon in ethnic minority or immigrant households for children to live with their parents, and in some instances, even their grandparents, into early adulthood or after having children. C.A.R.’s Millennial Survey revealed twice as many Asians and Hispanics live at home with their parents compared with those who identify themselves as whites.. Despite their financial troubles, millennials remain optimistic. According to data from Wells Fargo, more than three out of four millennials are confident they can address their financial problems in the next 10 years. And they might be right; there is a silver lining for their earnings: older millennials (those ages 27-34) have a median annual household income of $50,000, compared with $30,000 for their younger cohort of 18- to 26-year olds, according to C.A.R. So there is hope yet. While they may not have a high income now—they are after all still under 35 years of age—their earnings will increase as they age and advance in their careers.

Another hurdle for millennials to overcome in buying a home is debt. In the U.S., national student loan debt is estimated to be more than $1 trillion, with an average individual debt level of $29,400 in 2012, according to The Institute for College Access & Success. Student loans are not the only debt that millennials have; they also have auto loans and credit card debt. Forty-two percent of millennials said debt is their biggest financial concern at the moment, with 16 percent of their average monthly household income going to pay credit card debt, 15 percent going toward a mortgage, 12 percent toward student loans or education expenses, and 9 percent for auto loans, according to the Wells Fargo millennial report. In California, millennials are faring a bit better than the national figures suggest. About half of Californian millennials do not have student debt. One-third have a student loan balance of less than $20,000, and only 17 percent have student debt of more than $20,000. Sixty-one percent of millennials do not feel their student debt is preventing them from qualifying for a mortgage. However, the majority have other debt, such as credit cards and auto loans, which would make it difficult for them to buy a home. About four out of 10 feel that credit card debt would make it difficult for them to buy a home, compared with about one out of 10 who feel that their student debt would prevent them from qualifying for a mortgage. In fact, C.A.R.’s Millennial Survey found that most millennials are uncertain or doubtful they could obtain a mortgage if they applied now, but they remain optimistic about the future. The majority expect to buy a home within the next five years.

While they may not be able to afford to buy a home now, most millennial renters feel that homeownership is important because it gives them the freedom to do what they want with the property, and they expect to buy a property in the near future. California millennials prefer single-family homes, as two out of three indicated they plan to purchase a single family home, compared with only 12 percent who plan to purchase a townhome or condominium. Contrary to popular belief, the ideal home for many would be on a big lot with lots of land (42 percent) or in the suburbs (41 percent). Fewer than one in three indicated an urban location preference for their ideal home, C.A.R.’s Millennial Survey found. Many have speculated that millennials don’t want to be home owners and that they instead strive for the urban lifestyle. However, numerous surveys have found otherwise. Most millennial renters feel that homeownership is important. Californian millennials, like their predecessors, aspire toward homeownership. Affordable home prices, problems with credit/mortgages/ taxes and maintenance are some of their biggest concerns about owning a home. Debt and slow wage growth are also concerns. Millennials want to get married, have children, and buy homes; they just don’t want to do it as early as previous generations and feel they don’t have the financial means to do so now. But they’re encouraged, with 72 percent feeling confident they will be able to save enough for the lifestyle they hope to have in the future. Despite the financial obstacles they now face, millennials remain optimistic about the future—71 percent feel they can attain their goals, and 68 percent anticipate they will have a better standard of living than their parents, the Wells Fargo millennial report found.

® Carmen Hirciag is a Senior Research Analyst with C.A.R