Carlos Vaz is founder and CEO of CONTI Capitala real estate investment company that offers capital solutions for multi-family real estate.
Monitoring demographic shifts is a critical part of any business practice, and as such, my company, CONTI Capital, has been closely monitoring the remarkable impact of the Millennium Generation on housing demand.
The US now finds itself with a huge surge in housing demand and not enough offer, and part of this demand is due to the millennial generation. As they begin to form families and advance in their careers, this large segment of the population is confronted with high house prices and rising interest rates. While these factors may depress home sales, I believe the housing need is still strong.
Who are millennials?
As of April 2020 there were: more than 72 million millennials in the US, making the group larger than Gen-X and the baby boom generation.
It cannot be assumed that this generation will influence business in the same way as previous generations. Millennials often differ from their elders in their approach to important life milestones. For example, they tend to get married later in life than previous generations. In 2014, 28% of millennials were married when they were between 18 and 33 years old, compared with 38% of Generation Xers and 49% of Baby Boomers when they were in that age bracket. Likewise, millennials tend to have children later in life.
The number of millennials in my company is enough to fuel much of the housing demand analysis. The number of new households increased by 1.6 million between the first quarter of 2020 and the first quarter of 2022, according to Harvard University Joint Center for Housing Studies. Many of those households are millennials who put off living on their own in their 20s or early 30s.
Many millennials want to spread to the suburbs, who want the larger space that comes with a detached home and access to quality schools. However, the obstacles for hopeful starters in the housing market are great, both financially and from a supply point of view.
How do market forces affect this demographic?
US home prices rose 18.3% between May 2021 and May 2022, according to the The Federal Housing Finance Agency’s Home Price Indexcaused by a lack of supply and fierce competition. Home buyers are also dealing with rising mortgage rates, which are the result of the Fed’s attempt to cool inflation with: raising interest rates. A 30-year mortgage rate is 5.55% at the time of writing, according to Freddie Mac. Although mortgage rates have not historically been high, the rate of increase has unparalleled.
The impact on the average millennial tenant is huge. A typical 7% down payment is $27,400 on a home with an average price as of April 2022, according to the Harvard University Joint Center for Housing Studies. This requirement alone eliminates 92% of renters, who have only saved $1,500 on average. Even if the down payment were reduced to 3.5%, the monthly mortgage payment on a mid-price home would be just $2,020. With these pricing factors in play, the minimum income needed to pay these payments has increased from $79,600 in April 2021 to $107,600 in April 2022 – 4 million renting households out of the market.
Renting is the only option for many millennials.
Where are millennials who need a place to live, and how can real estate investment companies respond to this reality? Because of these affordability challenges, renting is a lot more viable option (paywall). Millennials who saved up to buy a home before the market became unaffordable now have the option of buying either a high-end Class A apartment or a single-family home, which can provide them with the benefits of suburban life without the financial burden.
While some economists have worried as house prices began to rise that we could see the beginning of a housing bubble, pent-up demand from the millennial generation will give much strength to certain housing markets across the country, according to Business Insider. I have long argued that we are not in a real estate bubble, especially in the Sun Belt markets.
Real estate professionals need to be aware of the situation we face – there is still demand within this demographic, not just for multi-family but also single-family homes, which would likely appeal to millennials starting families and looking to spread out. While SFRs have gotten a lot of attention from investors, I don’t think we’ve hit the cap on demand for these assets yet.
It is important that developers listen to the needs of this group when planning new properties. Millennials often expect to find a lot of information online when looking for an apartment, and they may be looking for a coworking space if they don’t often work from an office.
Given the huge demand for housing in the coming years, supported by the millennial generation, I think the multifamily market is still in a stable position, despite concerns about the economy and market performance.
I would advise business leaders not to panic as we approach the coming year. Look beyond the headlines and find a reliable source of data and leading indicators in your field. What do the numbers really tell you about the future? House in your regional market to get a sharper picture of the months ahead. Keep in mind; this is not 2008 and in my opinion the demographics are stronger. It is up to business leaders to allocate resources for tracking the economic, social and financial statistics that will have an inordinate impact on the success of their companies.
I believe that multi-family investment in times of economic turbulence stands up to the challenge because people always need a place to live. While rising mortgage rates and the low supply of detached homes may present a barrier for millennials, these factors continue to increase the value of multi-family homes. Millennials remain a target demographic for real estate professionals, especially as they form households.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.