“To buy or not to buy, that is the question.” — The Millennial Generation, born 1981 to 1996.
With apologies to William Shakespeare, the attitude and behavior of millennials is reshaping the economic and political landscape. Take household formation, for example, which is when traditional married couples, domestic partners, or groups of friends pool resources and build or buy a home. Household formation accelerated in 2015 after eight years of stagnation, fueling growth in the housing sector — a key component of economic health in the United States.
Wells Fargo Investment Institute stated in a recent report that this uptrend continues because of improving labor markets, millennials leaving the nest for the rental market, and the eventual desire to become first-time homebuyers. Annual household growth increased by 1.7 million units in 2015, according to the U.S. Census Bureau. This more than doubled the 700,000 unit increases in 2013 and 2014. In fact, the last time household formation was higher was 2005.
Millennials want mobility, flexibility and a clear understanding of their financial commitment. The 2008 credit crisis may have had an impact on their opinion of excessive debt and leverage, especially if relatives, parents or loved ones suffered through foreclosures, short sales and repossessions.
Sign Up and Save
Get six months of free digital access to The Idaho Statesman
Pay increases are a catalyst for the millennial home-buying decision as well. High-income buyers may skip an entry-level home and go right for the “move up” home. This includes new construction, and it helps the overall economy. Higher incomes and professional advancement give this demographic a sense they are doing well financially and can afford responsible ownership, which includes mortgage debt service, timely payments and regular maintenance. Borrowing costs remain low by historical standards.
A widening affordability gap could discourage household formation if housing prices outpace wage gains. Limited access to credit is another deterrent. Rising rent consumes more savings that could be set aside for a down payment. Some surveys suggest that buying is more affordable than renting in almost every major U.S. market, assuming that career demands don’t force an unexpected move.
My three adult children are millennials, and this group is quite unique in its view of the world, more so than Generations X and Y. Their decisions about relationships, money and traditional values like homeownership may surprise you. Don’t underestimate their power and influence over the economy in the decades ahead.
Mark Daly is managing director and investment officer at Daly & Vachek Investment Consulting Group of Wells Fargo Advisors. (208) 333-1433. This column appears in the April 20-May 17, 2016, edition of the Idaho Statesman’s Business Insider magazine as part of a special section on residential real estate.