For all the speculation as to why millennials are not buying into the housing market, Freddie Mac says the answer is basic–housing costs are rising faster than incomes. And they've been doing so since the beginning of the century.
Freddie Mac’s report looked at economic and demographic trends from 2000 to 2016 to identify the causes behind the 8 percent decrease in homeownership rate among adults under age 35 since the rate’s peak in 2004.
Homeownership rates dropped steeply after the crash in 2008, and overall, around 700,000 young adults did not buy a home between 2000 and 2016 because of increases in inflation-adjusted home prices and rents, according to the report.
While half the reason, Freddie Mac found, was higher rents and home prices, the other half was a mix of socio-economic factors like lower marriage and fertility rates among younger adults, as well as student loan debt—which accounted for 13 percent of the reason behind low ownership rates among the young.
“Historically low mortgage rates and increasingly favorable employment conditions should have generated a far greater number of home purchases by young adults, especially in the last five years,” said Sam Khater, Chief Economist at Freddie Mac. “Unfortunately, home-price and rent growth above incomes–driven primarily by a severe shortage of housing supply–have been too high of a hurdle for many would-be buyers to clear.”
Khater said that while rising home values continue to build housing wealth for most homeowners, weaker affordability conditions have led to “a missed opportunity for the interested young buyers who are unfortunately priced out of the market.”
The issue doesn’t look to be going anywhere anytime soon. By 2025, the report speculated, more adults between 25 and 34 will buy homes, but rates will still be below the 2004 average.
“Demographics, housing preferences, and economic conditions will all play a role in the direction of homeownership in coming years,” Khater said. “If economic conditions improve, and incomes and entry-level housing supply increase in a meaningful way, homeownership rates for today and tomorrow’s young adults could exceed our current projections.”
Those projections put rates between 56 and 60 percent by 2025.
Read more about the Freddie Mac June Insights Report: