A combination of high home prices, large debt loads, and caution about the recent housing bust deters Millennials from buying homes today.

In the 60 years between World War II and the housing bust, each generation obtained an education, secured a job, got married, and bought a home in the suburbs, enshrining our nostalgic notions of the American Dream. Unfortunately, lenders destroyed all that.

Irresponsible lending inflated a massive housing bubble, saddled a generation with onerous student loan debts, and poisoned the economy so many can’t find a job, which caused many Millennials to postpone marriage, family, and buying a house. Most housing market analysts blithely assume Millennials will follow the same path as preceding generations once they have opportunity, but what if Millennials decide not to buy homes?

by Chris Matthews, September 22, 2014, 5:00 AM EDT

But they’re moving in with friends and relatives instead, not buying their own homes. This doesn’t bode well for the American housing industry. …

Over the past two years, Millennials have been moving away from home, but they don’t actually have enough money, or desire, to form their own households. The homeownership rate among Millennials continues to fall:

Most analysts concluded the home ownership rate among Millennials bottomed with the housing market in early 2012, and the rate of home ownership would steadily increase as the economy improved and Millennials bought homes. It isn’t working out that way largely because house prices went up so far so fast, many Millennials can’t afford to buy, and with caution in the wake of the housing bust, many Millennials don’t want to risk being trapped in underwater houses during the period in their lives when they are most likely to move to advance in their careers.

The falling homeownership rate and falling “headship rate”—which is the share of Millennials who are the head of a household regardless of whether they own real estate—suggest that this generation is still doubling up with friends or other relatives even if they aren’t living with Mom and Dad. This isn’t good for the future of the construction and real estate industries. Millennials are a massive demographic group, slightly larger than even the Baby Boomers. If this group builds the wherewithal to strike out on their own and buy homes, that could be a great boon for the economy. But at this point, Millennials are not there.

Full-time, good-paying job opportunities eluded Millennials thus far, so household formation and home ownership rates languish. Plus, student loan debt burdens make it difficult for many Millennials to support a housing payment of any kind; thus many live with parents or friends.

By Natalie Kitroeff September 23, 2014

Should you worry that student loan debt is undermining the health of America’s housing market? It depends on whom you ask. One report answers with a resounding yes. The study, released on Friday by John Burns Real Estate Consulting, says student debt will knock home sales down 8 percent this year, with 414,000 fewer home purchases and $83 billion in “lost activity” in the housing market. “If you’ve got a huge chunk of student debt, then you obviously can’t allocate to saving,” says Rick Palacios, director of research at the advisory firm, who co-authored the report. “You’re sacrificing purchasing power for certain things, and one of those things is housing.” Student debt would also force people to spend less on their homes, the report found. Every $250 that a young person pays toward student debt reduces the size of the mortgage she qualifies for by $44,000.

When lenders evaluate a borrowers ability to repay a loan, they look at two important financial ratios: front-end DTI and back-end DTI. The front-end DTI is the percentage of income a borrower spends each month only on housing costs: principal, interest, taxes, insurance, and HOAs or other costs. This is typically limited to 31% of total income, but this standard has been both higher and lower at different times. The more important ratio is the back-end DTI, the total amount of debt service of all kinds as a percentage of borrower income. The back-end DTI encompasses the front-end DTI of housing debt, plus it adds all other financial obligations a borrower might have — including student loan debt.

Academics and analysts can debate the impact endlessly, but the lack of first-time homebuyers, particularly Millennials, strongly suggests the back-end DTIs limits participation in the housing market. And since most toxic loan programs are banned, since back-end DTIs are capped at 43%, and since lenders are afraid to make bad FHA loans due to put-backs, lenders have no way to stretch Millennials and get them into houses, which is good because houses obtained with excessive DTIs lead to delinquency and foreclosure.

Jeff Fromm, October 2, 2014

For many Americans, home ownership and improvement is an essential part of our country’s identity. Yet, the millennial generation is rejecting this traditional view, …. First, let’s take a look at the data. The most recent news from the U.S. Census’ Housing and Vacancy Report states that home ownership for adults younger than 35 is the lowest in recorded history. Why aren’t millennials buying homes and investing in home goods? There are three economic and social factors at play: As it’s been well-reported, millennials are carrying an overwhelming amount of student debt. Students who graduated in 2014 average $33,000 of debt, more than double the amount borrowers paid 20 years ago. These financial burdens make them less-than-ideal candidates for loans. Millennials saw their parents suffer through the 2008 housing bubble. Every generation before millennials were raised to believe that a home was a sound investment—one of the most important parts of the American dream. This generation seems to be the first in many decades that doubts the rosy real estate picture. Millennials are redefining the American family. Millennials are delaying marriage and childbirth at rates never seen before. This huge cultural shift will have a direct impact on housing: millennials may not need the same space, permanence, and practicality that most Americans want out of their housing. … Millennials, particularly millennial parents, are one of the most financially conservative generations. They’ve seen the housing bubble, the dot-com bust, and the Great Recession. So, when they eventually do buy a home, it’s with a limited budget in mind. They rarely overspend or extend themselves. …

Millennials resist participation in the economic casino of bubble after bubble that enriches the financial elite while impoverishing everyone else. They watched the previous generations play that game and lose, and Millennials recognize the folly for what it is, a game rigged in the favor of financial elites. They also recognize the only way to win is not to play — so they don’t.

Lenders with assistance from politicians, bureaucrats, and the federal reserve successfully engineered a reflation rally that caused house prices to rise much more rapidly than the natural market would have. This was necessary to save the banks by restoring collateral backing to their bad bubble-era loans. The problem with Millennial participation in the market is due to one item the market manipulators can’t control: buyer psychology.

Think back to 2004: house prices were already overvalued, but with the proliferation of Option ARMs, buyers could finance more, so high prices were pushed even higher — but that required buyers to participate. Individuals had to set aside common sense, accept the “innovations” of lenders weren’t too good to be true, and use these toxic loan products to push prices higher. In other words, enthusiasm and greed were needed to override any caution and prompt buyers to commit financial suicide. Since buyers at the time didn’t believe house prices could go down, and since they believed they needed to buy now or be priced out forever, they bought and bought and bought.

Now compare that to where we are today. House prices are high, but still affordable, and we just experienced a rapid house price rally. The ingredients where there for a full-blown outbreak of kool-aid intoxication. We saw glimpses of that in early 2013 as the frenzy was palpable, but participation in the madness was not widespread, and once it died, it died. Millennials didn’t participate in large numbers, and based on the comments I’ve read on this blog, many watched with bemusement but were not motivated to jump in.

Millennials don’t believe house prices can only go up; in fact, they know with certainty house prices can fall significantly.

Millennials don’t believe they can be priced out forever, and even if they did, they don’t seem bothered enough by the idea to buy a house as an act of foolish desperation.

Millennials don’t believe debt is wealth. They are acutely aware of the problems of the student loan debts they’re stuck with, and they aren’t anxious to borrow six times their yearly income to potentially trap themselves in a house they may not want in a few years.

In my opinion, Millennials act quite rationally, and we shouldn’t expect them to participate in the housing market in large numbers over the next five to ten years. Perhaps after their student loan debts are repaid and they have steady jobs, they may be willing to buy, but for the foreseeable future, don’t count on a resurgence of Millennial buying to pump up the housing market.

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