Home Ownership Is Radically Different For Millennials

bitter news to share with millennials about their future in the housing marketIn case you weren't paying attention, the oldest millennial is turning 41 this year. Generation Y is not so young anymore.

As a real estate agent who is among the last few stragglers of the baby boom (or possibly among the earliest members of Generation X by some accounts), I have some bitter news to share with millennials about their future in the housing market. Simply put, it's going to be different for you than it was for your parents, your grandparents, and their parents too!

Follow along as I share a simple case study that will clearly show that the millennials will face a housing market like no other generation going back to post-World War II, and it will be unsettling for those young homeowners today who do not plan ahead.

Why It's Different For Millennials

Future Of Housing For Millennials

If you have been a regular reader of the Tallahassee Real Estate Blog (thank you!), then you have heard my concerns about a generational shift in housing that is going to separate the "haves" from the "have nots" by devastating home affordability.

I believe this will occur for two primary reasons. First, the cost of homes is going to go higher at a rate faster than we have experienced in the past. If you'd like to know more about how I reached that conclusion, you'll need to read from these articles.

Secondly, and the point that we'll explore today, is how millennials through the years are going to be the generation that oversees the biggest shift in the mortgage market in more than 40 years.

Historic Mortgage Interest Rates

Demand has been very high due to wonderful home affordability levels that are the result of historically low mortgage interest rates. The following graph plots the average monthly 30-year fixed-rate mortgage since 1971.

graph plots the average monthly 30-year fixed-rate mortgage since 1971

We have enjoyed low rates since 2000, and then COVID hit and brought in a period of market-bottom rates. For consumers who do not often pay attention to mortgage interest rates and the housing market, this is their new normal. But history offers a different story. There is convincing data that serves as historic proof that interest rates go through cycles, and the low-interest-rate cycle has run a long time.

When I started my career in real estate (1991), the ten-year average for mortgage interest rates was more than 12%. This means that the typical homeowner was paying more than 3 times the interest that today’s homeowners are paying and more than 4 times the rate last year's buyers were paying.

FOUR TIMES! Take that for perspective, money is VERY cheap today and it is helping buyers spend more on homes without raising their monthly debt coverage obligations. There are some who think that we are now in a new age where interest rates will be low forever, but they have not done their homework.

If you think that times have changed and that historic norms won’t return, I urge you to read “This Time Is Different: Eight Centuries of Financial Folly,” you can find it on Amazon by clicking the link. The book explains how many smart people over the past 800 years (wrongly) concluded that the cycles were no longer in play for interest rates.

Let’s focus on the orange dashed line in the graph. It shows that rates have generally been falling for more than 40 years, meaning that anybody who purchased a home in the past fifty years likely found lower mortgage interest rates when they went to buy their next home (typically 7 to 10 years after their purchase). This means that the "move-up" buyer could buy a more expensive home while keeping their monthly mortgage payment comfortable, and the downsizer (the "move-down" buyer) could nearly eliminate their monthly mortgage obligation.

I believe history suggests we might be in for another 50-year run (or so), meaning every time a millennial is ready to make their next move, they will be facing mortgage interest rates that are higher. Not just higher than today, rather higher than the rates were when they made their previous purchase. This will impede the relatively stable home affordability rate to continue as we've seen since 1970.

Home Affordability Is Tanking

It was less than a year ago when I reported that home affordability (adjusted to inflation) was better than in most previous years going back to the 1990s. But I also warned that converging market forces would put an end to the good times.

Relatively stable home affordability rate since the 1970s to end

This graph measures home affordability by calculating the monthly mortgage payment of the median-priced home in Tallahassee over time. The payment and home prices are adjusted to 1991 levels with the CPI (inflation) index, thus revealing how home affordability has changed over the past thirty years as well as by providing a forecast through 2040.

The forecast has been created by using actual numbers through January 2022 and very conservative estimates of future home price growth and mortgage interest rate changes, and the average inflation measured over the past 30 years.

Just focus on the red line, that's the monthly mortgage payment (inflation-adjusted) that median homebuyers have and will face through 2040. Look at how far it moved already in 2022!

Today's $700 per month mortgage payment (adjusted to 1991 dollars) is projected to grow 170% to $1,892 (inflation-adjusted to 1991 dollars). It's a historically significant leap and far greater than the small growth that homebuyers experienced from 2004 through 2006.

In order to understand its impact on millennials and their future, I have created two scenarios that show what many millennials will face when they go to buy their next home, and one of them is not very pretty at all.

Get Our Free Market Update

Weekly Special real estate report covers the Tallahassee real estate market

Other buyers, sellers, lenders, and real estate agents have this critical information, and now you can too!

Get immediate access to our most recent newsletter.

Let more than 30 years of experience work for you with charts, graphs, and analysis of the Tallahassee housing market.

Each Monday morning we send out a simple, one-page report that provides a snapshot of the Tallahassee housing market. It only takes 2 minutes to read, but it gives you better market intelligence than most real estate agents possess. Just tell us where to send it below!

How Moving To A Larger Home Will Look In Ten Years

Each of the following two examples is built to show what the future will likely hold for somebody who buys a home today and then decides to move in ten years. I believe the assumptions on appreciation and mortgage interest rates have been very conservative, so the outcome is likely to be even worse than what we discover today. Our first example examines the plight of the millennial move-up homebuyer.

How Moving To A Larger Home Will Look In Ten Years

Each scenario starts with a homebuyer purchasing a $300,000 home this year. The white box shows the action taken by the buyer and the expected appreciation rate they will find in the market each year.

The green box shows the home's value at the end of each year, as well as the loan payment ($1,961 PITI), loan balance, and the homeowner's net equity from the sale of the home. Things are looking good at this point, as the homeowner has generated nearly $270K of equity in their ten years of ownership, with a constant low monthly mortgage payment of less than $2,000 per month.

The yellow box shows what a typical move-up might look like for today's buyer ten years from now. This will give our young millennials some gray hair if they are paying attention!

Historically, we find the average move-up to equate to about 150% of the buyer's existing home. So in our scenario, today's $300K home has grown to $605K in ten years, meaning the next move would be to a $908K home. I have used 100% of the buyer's equity from the sale of the first home as a down payment on the second home, but with interest rates moving (ONLY) to the 50-year average, the payment on the next home would jump 190% to $5,688 each month!

This means that a millennial will need qualifying income (in ten years) that is nearly triple their current earnings. While this might not be a big deal in silicon valley, I guarantee you it is going to put a crushing weight on move-up buyers in most local real estate markets! 

This is why we have been warning of an upcoming home affordability crisis that will be very difficult to overcome for the majority of people. It's also the reason that I think we'll see a shift (backward) to far lower homeownership rates, similar to what was seen before World War II.

How Safe Is Housing?

Will Assumable Mortgages Save Housing?
Will assumable mortgages save housing? Home affordability is becoming one of the hottest topics in the economy, but I was recently asked if assumable mortgages might bring some relief to homebuyers. This video shares what I think about how mortgage assumption will impact housing.
Economic Outlook For The Housing Market
Joe Manausa gives an update on the economic outlook for Tallahassee and the US housing market. Includes housing market forecast, housing market activity, and new construction analysis, and reveals how Tallahassee compares with the overall US housing market.
Will NINJA Loans Bring Down The Housing Market?
Housing Crash Coming? If you remember back to the housing bubble, we saw the growth of "NINJA" loans, as they were a segment of the home sales explosion.
6 Housing Market Rumors Debunked (1 Confirmed)
7 different housing market rumors are perpetuated as “FACT” in various forms of "hype." Discussion of this "housing market news" has been ongoing for years, so today, I want to put them all to rest.
Who To Blame For Soaring Home Prices
There is a huge shortage of homes in the US, and there is only one culprit to blame, and I’m going to tell you who it is!
The Truth About Real Estate Foreclosures Today
The Truth About Real Estate Foreclosures Today. There's a lot of hype and speculation about home foreclosures in the US. Joe Manausa unravels the latest Black Knight Mortgage Update to explain home foreclosures and how they will impact the housing market.
Is The Supply Of Homes For Sale Finally Rising?
Is The Supply Of Homes For Sale Finally Rising? Is the US housing market heading for a crash? Will home prices fall? Follow the metrics that clearly show what to expect from home prices and the supply of homes for sale in 2022 and beyond.
House Prices - Inflation Adjusted Home Prices
Just How High Are Today's House Prices? The price of houses in the US has risen to a toxic level, and many are wondering how they will be able to afford to live in their local communities
USA Today Misleads Readers About Home Prices
USA Today Misleads Readers About Home Prices - Median Home Price: The USA Today Network has been misleading readers, using the median home price change suggesting that houses are getting cheaper and a real estate crash is upon us. Is this poor journalism or is there something more to it?
Home Affordability Crisis - Major Housing Market Shift
Home affordability is plummeting, and this home affordability forecast explains why real estate prices are becoming less affordable with each passing month.
Housing - Do You Follow Your Gut (Or Analytics) In Housing?
I think the signs in the housing market are loud and clear, yet most real estate reports I read or view are missing the most critical factor in housing today.
Will 2022 Be The Year Of The Foreclosure?
Will the housing market soon be flooded with foreclosures? There are eight million borrowers in the US that enrolled in loan forbearance plans that allowed them to quit making mortgage payments for quite a long time. Will 2022 be the year of the foreclosure?
Home Ownership Is Radically Different For Millennials
This is a simple millennial housing case study that will clearly show that the millennials will face a housing market like no other generation going back to post-World War II.
US Housing Market Forecast 2022
Complete housing market forecast for 2022 including data on Population, Mortgage Interest Rates, Jobs (The Economy), New Home Construction, Foreclosures & Forbearances, Supply & Demand, Home Prices, and Rental Rates.
US Homeownership Rate Crash
Homeownership has been high since World War II, but there is a generational shift in the US housing market that is occurring with two key trends that will soon destroy home affordability and then homeownership in the US.
When Will Home Prices Fall?
Are Home Values About To Crash AGAIN? Now that we've seen about three years' worth of skyrocketing home prices, prudent buyers with memories are asking when home prices are going to start falling again.
4 Important US Housing Market Trends Impacting 2022
Here’s the thing about forecasts, they require a working knowledge of what consumers face when selling and buying homes. It's these pressure points that I'll share with you as I prepare my forecast for 2022.
Foreclosure Wave? The End Of The Mortgage Moratorium And Forbearance
Many claim a foreclosure tsunami will be the cause of a new housing bubble, yet I believe they are a little short-sighted and I have some evidence that shows this is just not going to happen.
How Often Do Home Prices Fall?
Are home prices falling? Will house prices fall soon? Home prices are soaring, buyers are having to pay above most sellers' asking prices, and the housing market feels just like a feeding frenzy during Shark Week on the Discovery Channel.
Proof Of Runaway Appreciation In Real Estate?
Over the years, we've come to expect "normal" real estate appreciation to be just over 3%, but homes are appreciating much faster than a normal rate. Home values are moving higher fast enough to cause alarm bells to ring, and today's report will show you exactly how the housing market has performed.
Signs Of A Housing Market Collapse?
When we study the US median market rent, we see signs that paint a clear picture of the future of home prices and home values.
Home Affordability Forecast
Real estate prices are moving higher (faster). This is a real estate forecast you need to see. Many have been misinformed about home prices and the housing market and must watch and internalize the message from this video.
Housing Shortage Confirmed: Median Market Rent Explosion
The lack of home builder production has home prices and home values soaring, now look at what's happening to rents too!
What Do Low Mortgage Interest Rates Really Mean?
Every article or video about mortgage interest rates conveys that rates are low, but do you really know what it means?
Here's Where Home Affordability Is Heading
There is a generational shift occurring in the housing market that I reveal in this video. I’m talking about how buying a home over the next twenty years will be unlike what previous generations saw since the early 1980s.
The Truth About The Housing Bubble Of 2021
Will there be a housing bubble in 2021? - If you look at the most active real estate videos on YouTube, you'll find that the forecast for the next real estate bubble is very popular. Is there a housing crisis and will there be a housing crash in 2021? Or is it just sensationalism that drives people to watch these so-called reports? This video exposes real evidence and I will give you data that tells you everything you need to know about a housing bubble in 2021.
Are We Overbuilding Again?
I've been asked recently for my opinion on the number of homes being built in the US. Specifically, people are wondering if the ghost of 2006 has come back to bring more homes to the market than what can be consumed?

How Moving To A Smaller Home Will Look In Ten Years

Similar to the previous example, our second case examines the plight of the millennial move-down homebuyer.

How Moving To A Smaller Home Will Look In Ten Years

The move-down buyer is not going to face the same level of difficulty as did the move-up buyer. What's interesting is that we're seeing today's buyer sell today's home in ten years for the same price and equity, only to "trade" it in for a home that is 25% cheaper than today's home will be worth in 2032.

With higher mortgage interest rates, the move-down buyer will see their monthly mortgage payment drop from $1,961 to $1,920 each month (a decline of just 2%), so the financial element of the motivation to downsize is going to go away. There might be a good percentage of move-down buyers who do so to simplify the upkeep of their homes, but I suspect we'll see move-down buyers live in their homes longer and then move when they can do so without requiring a mortgage.

The reversal in the trend of mortgage interest rate change will reduce the number of both move-up and move-down buyers, so ultimately we'll see the number of purchase transactions in real estate decline in the future.

Tips For Homebuyers

9 Tips For Buying A Home In A Bidding War
Follow these 9 home buying tips to get your offer approved ahead of other buyers. These 9 tips for buying a home today will help you overcome multiple offers on a home.
Buy A Home Now Or Wait For 2023?
Are Home Prices Dropping? Will Rising Mortgage Interest Rates Bring Falling Home Prices? If you have been waiting for falling home prices, this is a very important video for you. Do you buy a home now or wait for 2023?
How To Get A Good Deal On A Home
Watch this short video before you buy a house to ensure you know whether to buy a home now or wait! This is the smart way to get a good deal on a house today.
Don't Lose Your Real Estate Contract Binder Deposit
As you prepare to buy a home, you'll want to follow this advice for home buyers. These real estate tips will help you ensure your real estate contract binder deposit is not forfeited to the seller due to mistakes made along the way.
Should You Get A 40-Year Mortgage?
Before you decide upon a specific mortgage amortization on a home loan, take a look at this quick case study that compares a 15-year loan with a 30-year loan and a 40-year amortized loan.
How Much Should You Put Down On A House?
Need some downpayment advice? Want to know what to put down on a house? There are issues you might not have considered when determining a home down payment, but my home buying tips include a side-by-side comparison of some options that will help you make the best decision.

Fewer Transactions, Not Fewer Houses

Fewer transactions in the real estate industry due to falling home affordabilityAn important takeaway from this is that just because people will be moving less often, it does not mean the US will need fewer houses. If our population continues to grow, then the demand for shelter will grow with it. The rising cost of land, sticks, bricks, and labor will make new home construction costlier and that means millennials need to be prepared to spend more for their housing than did the last few generations (as a percentage of income).

Rents will rise faster. Mortgage payments will rise faster, and that means that millennials will spend a greater percentage of their disposable income on housing. Unless the government gets heavily into the shelter-providing business, I don't see another way to avoid this fate right now. If you think you do, please give us some feedback below, I'd love to explore new ideas.

Your Local Expert In Tallahassee

When moving to, in, or from Tallahassee, you will fare better if you work with a local expert. We are here to help. If you have further questions on the Tallahassee real estate market, you can leave a comment below, give us a call at (850) 366-8917, or drop us a note and we'll give you the local information needed to ensure a successful, smooth transaction.

As a local born and raised in Tallahassee with a focus on customer service, I promise you'll find great success when working with Joe Manausa Real Estate, just as have our past customers. You can read thousands of their reviews reported on Google, Facebook and Zillow right here: Real Estate Agent Reviews Tallahassee.

The digital marketing guide for small businessesHave you heard about my new book "The Business of Getting Business?" It's a comprehensive guide for small businesses to help them make the move to digital. For those of us who want to survive and thrive in a world where large corporations are taking over, it is a must-read. It's also the perfect guide for how to sell a home in the digital age. You can find The Business Of Getting Business by clicking on any of the trusted retailers below.

Real Estate Agent reveals in Tallahassee, Florida

Think all REALTORS are alike?

Read what people are saying about working with Joe Manausa Real Estate! You can see thousands of real customer reviews reported on Google, Facebook and Zillow at this link: CLICK HERE FOR REAL ESTATE AGENT REVIEWS.

Post a Comment

(850) 366-8917