While millennials so far have yet to find their place in the housing market, the stage is set for younger Americans to become the driving force in the residential sector in 2015, according to a forecast from Zillow.
In his 2015 outlook, Zillow's chief economist, Dr. Stan Humphries, predicts millennials will take on a much greater presence in the housing market, overtaking Generation X as the largest group of homebuyers.
"Roughly 42 percent of millennials say they want to buy a home in the next one to five years, compared to just 31 percent of Generation X," Humphries said. "The lack of home-buying activity from millennials thus far is decidedly not because this generation isn't interested in homeownership, but instead because younger Americans have been delaying getting married and having children, two key drivers in the decision to buy that first home. As this generation matures, they will become a home-buying force to be reckoned with."
Analyzing current and expected trends, Humphries says a growing number of Gen Y renters will be motivated to make their first purchase as rental costs rise an average 3.5 percent annually and home value growth slows to a yearly rate of 2.5 percent.
"As renters' costs keep going up, I expect the allure of fixed mortgage payments and a more stable housing market will entice many more otherwise content renters into the housing market," he said.
At the same time, he expects homebuilders will take a cue from this year's underwhelming new home sales figures and make a switch to build cheaper homes to narrow the price gap and make their stock more attractive.
"In recent years, home builders seem to have made a conscious decision to sell fewer, more expensive homes instead of more, cheaper homes," he said. "In 2015, that will change, especially as demand moves toward the lower end of the market as millennials begin buying en masse."
While those factors will work in the favor of first-time homebuyers, Zillow also expects the housing market as a whole will shift more to the advantage of buyers, who have struggled throughout the recovery in what has largely been a seller's market: low inventory, tight credit, and intense competition from investors and all-cash buyers.
Humphries says the tables will turn in 2015 as more inventory comes to the market, giving buyers more negotiating power and putting pressure on sellers to compromise.
"This more balanced market will be smoother sailing for everyone, both for buyers in search of a competitive advantage, and for sellers who turn around and become buyers themselves," he said.
Based on local income patterns, home prices, and affordable housing stock, Zillow predicts 2015's best markets for first-time buyers—especially those in the millennial age range—will be Pittsburgh; Las Vegas; Chicago; Atlanta; and Hartford, Connecticut.