Millennials are having trouble breaking into an unaffordable housing market. Record high home prices and limited new listings are forcing them to reconsider homeownership, leaving many in long-term rental situations or non-traditional living accommodations.
- Rising home prices and interest rates are worsening housing affordability for millennials
- Robust job growth is fueling strong housing demand, despite low inventory
- Home prices are expected to continue growing 2-6% annually through 2020
Millennials are among the main victims of today’s unaffordable housing market. They are leaving college with incomprehensible (for a 22-year-old) amount of student debt and trying to enter a housing market that has record-low affordability. High-priced areas like New York, Los Angeles, and San Francisco are the most punishing to this new generation.
“With interest rates and home prices both on the rise, first-time homebuyers – largely millennials – may want to consider making the jump from renting to owning sooner rather than late,” said Ralph DeFranco, Ph. D, global chief economist at Arch Capital Services Inc.
The saving grace for millennials is the robust job market and low unemployment. “Our research shows few signs of a housing bubble because the typical warning signs aren’t present,” DeFranco continued. “A robust job market should keep the housing market strong and growing, short of an unexpected event and despite the contrary pressures that may be created by the tax bill.”
A robust job market is what millennials will need in the coming years, as home prices show no signs of falling off anytime soon. Home prices will continue to grow between 2-6% through 2020, according to Arch Capital Services. That growth is on top of the 6.2% year-over-year price growth in 2017.
Mortgage rates are also on the rise. The Fed already hiked rates once and foreshadowed more increases throughout 2018. The rising mortgage rates will remove many homeowners’ incentive to sell, which will contribute further to concerns over low housing inventory.
“Rising rates give existing borrowers with fixed-rate mortgages a financial incentive to stay put,” according to Arch’s housing and mortgage report. “Homeowners will have more incentive to seek second liens or home improvement loans rather than move to a new home or refinance.”