Are boomers really stopping millennials from buying houses?

Are baby-boomer homeowners preventing millennials from buying houses? Could the decisions of millions of older owners to “age in place” rather than sell their homes explain why millennials are lagging behind in homeownership?

A provocative new study in the US from federally chartered mortgage investor Freddie Mac suggests the answer may be yes.

“Who is living in those homes that millennials might otherwise have bought?” ask the study’s authors. Their answer: baby boomers, war babies and people born in the 1930s. By hunkering down longer than would have been typical of earlier generations — who would have sold their homes in greater numbers by now — today’s seniors are effectively denying their houses to the real estate market.

As a result, according to the study, about 1.6 million homes have been kept out of buyers’ reach in recent years, sharply reducing the availability of houses nationwide that millennials could buy.

“The most important fundamental in today’s housing market is the lack of houses for sale,” says the Freddie Mac study, which was conducted by the company’s economic and housing research group.

Does all this sound right? In the US, there’s no question that tight inventories exert upward price pressure on properties that are available, and they make it tougher for many buyers to afford homeownership.

And there’s no question that millennials haven’t opted for ownership at rates comparable to earlier generations of Americans.

When the Urban Institute’s Housing Finance Policy Centre studied the matter last summer, it estimated that 3.4 million millennials in the US are missing from the ranks of homeownership, based on the behaviours of boomers (born from 1946 to 1964) and Generation Xers (1965 to 1980). Millennials, born after the Gen Xers through 2001, are eight percentage points behind earlier generations at the same age.

In New Zealand, home-ownership levels among millennnials is similarly low.

But should boomers take the rap for the gap?

Previous studies of millennial homebuying in the US have pointed to multiple causes for differences in ownership rates. Last month, the US Federal Reserve identified ballooning student-loan debt loads — now an estimated US$1.5 trillion nationwide — as a key barrier to millennial home purchasing. It estimated that 20 percent of the decline in ownership among young adults since 2005 can be attributed to student debt, which doubled in real terms during the decade ending in 2015.

Other important factors include:

●High rents that many millennials pay, which make it more difficult to save for a down payment.

●Later ages for marriage and childbearing, thereby postponing key traditional inflection points that stimulate homebuying.

●Locational choices by millennials themselves, who often show a lifestyle preference for higher cost urban centres.

Last December, OneRoof found that first-home buyers may be psyching themselves out of the market.

Although first-home buyers made up the largest share of all new mortgage registrations in 2018, OneRoof found that there is still the perception among Kiwis that it is impossible to buy a house.

The rapid growth in house prices in the last five years, especially in Auckland, has put groups who have yet to enter the market at a disadvantage.

Would-be home-owners hear the talk about the lack of new homes and the large sums of money required for deposits and feel locked out, even give up.

James Wilson, director of valuation at Valocity, says the narrative that it’s impossible to buy a first home can stop potential buyers in their tracks before they even start, making it a self-fulfilling prophecy.

Research by Massey University Financial Education Centre in 2014 found that 21.8 per cent of the 2,287 respondents aged 18 to 45 were not buying because of a lack of self-belief.

Behavioural economist Ananish Chaudhuri, head of the Department of Economics at the University of Auckland, told OneRoof in December that it is not surprising that negative narratives make first time home buyers more reluctant.

He pointed out that it’s “bloody hard” for first time buyers to get on the property ladder. But the negative narrative in the mix made things worse.

“For almost all of us, buying a house is the biggest investment of our lives involving significant uncertainty regarding current and future mortgage rates as well as current and future incomes,” Chaudhuri said.

“It is well known that most of us struggle with the trade-off between smaller rewards that are available soon compared to larger rewards available at a point in the future.

“Saving up to buy a house presents this trade-off between smaller-sooner versus larger-later rewards in it starkest form. When you add a significant amount of uncertainty and a negative framing to the mix, the choices become even more challenging, which may well prompt people in walking away."

Studies in the US have found other factors at play. There are financial constraints on senior owners beyond simply wanting to age in place and enjoy their homes. Some seniors choose not to sell because they don’t want to give up mortgages they have at favorable interest rates — the “lock-in effect.”

Another factor the Freddie Mac study doesn’t mention: Homes owned for many years often are not what millennials are shopping for anyway — they’re too big and may have too many bedrooms. Plus, they might have interiors that require extensive updating. They’re frequently priced for move-up buyers, not first-timers.

You can’t blame it all on the old folks.

- Reporting by Washington Post and OneRoof