America is running out of houses amid a historic housing shortage and record-high selling prices.
A recent bank note from Jefferies said the US was short 2.5 million homes, while Freddie Mac put that estimate higher at a shortage of 3.8 million. There are 40% fewer homes on the market than last year, a Black Knight report found.
It’s bad news for many aspiring homebuyers — but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.
Daryl Fairweather, the chief economist at Redfin, told Insider it was unfortunate the generation that suffered from the last housing crisis — entering the job force in the middle of a
— was now facing a different kind of housing crisis.
“Now that they have economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”
The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic. It comes at a time when millennials have reached the peak age for first-time homeownership, according to CoreLogic, and led the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.
Housing was largely an out-of-reach dream for millennials for years. Even before the pandemic, they were struggling to take advantage of historically low mortgage rates. But rates dropped even further after the coronavirus arrived, fueling a yearlong housing-market boom that never abated and soon morphed into an inventory crisis.
While CoreLogic said millennials were set to drive the housing sector for a long time to come, they won’t have an easy time of it if skyrocketing prices and tight inventory create new affordability challenges. Just as homeownership fell within their grasp, it’s slipping out of their fingers yet again.
Not enough homes since the Great Recession
A dozen years after a housing bubble spurred the financial crisis of 2008, many millennials have found themselves juggling the lingering effects of the Great Recession with the coronavirus recession, staggering student debt, and soaring living costs.
Chief among the latter has been the price of homes. By 2018, millennials buying their first home were paying 39% more than boomers did at the same age nearly 40 years ago. The increasing cost of a down payment made it even more difficult for millennials, already struggling to build wealth, to save.
Then came the 2020 housing boom.
Millennials led all generations in homebuying last year, according to Apartment List’s homeownership report, accelerating a five-year trend in millennial homeownership rates rising the fastest. The millennial homeownership rate climbed to 47.9% from 40% just three years ago, according to the report. The Jefferies note also said homeownership rates had increased among those ages 25 to 29 and especially accelerated for those ages 30 to 34. The same note also pointed to the underbuilding of homes dating back to the Great Recession.
“We’ve been underbuilding for years,” Gay Cororaton, the director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US had been about 6.5 million homes short since 2000 and was facing a two-month supply of homes that should look more like a six-month supply.
There have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s, according to Fairweather. She added that was not enough homes for millennials, who are the biggest generation, to buy.
The pandemic and a lumber shortage worsened the situation
Further driving the housing scarcity is the pandemic. Some owners aren’t listing their homes as a safety precaution, Cororaton said. Others are wary of putting them on the market for fear of being unable to find an affordable replacement to buy.
Cororaton said there might have been more homes on the market absent a historic lumber shortage. Lumber factories shut down almost immediately in March 2020 because of safety restrictions. When the housing market opened up, Americans bought more new houses than the lumber industry could keep up with. As demand spiked, lumber prices jumped by almost 200% since April 2020. It led to an average unexpected price increase of $24,000 for new homes in the past year, according to NAR, one aspect of a nationwide record-high rise in housing prices.
Home prices have been going up for years, at a steeper rate than they did ahead of the Great Recession. But the national median home-sale price hit a new high of $353,000 in March, according to Redfin. Housing prices are up 18% year over year, Fairweather said. “I don’t see values going down at any point,” she added.
The shrinking housing inventory further inflamed a market already hot with demand, sparking cutthroat competition. The typical house is getting snatched up in less than a month as aspiring homebuyers find themselves in bidding wars, putting in all-cash offers, and offering higher down payments.
Cash sales have increased from 18% to 23% in the past year, and first-time homebuyers are more likely to pay a full 20% down payment than they were last year, according to NAR.
“Because the market is so tight, you want to sweep in and make your offer more attractive,” Cororaton said, adding that a 20% down payment was more appealing to the seller because it signifies financial capability.
Homes sold in March had nearly five offers on average, compared with two offers in 2019 and 2020 at the same time. Seeing some houses with multiple offers, some buyers on tight budgets aren’t even bothering to jump into the bidding war.
Losing an avenue for building wealth
A heated market running low on homes and high on competitive demand has ultimately set a new pricing precedent that is pushing homeownership further away for many first-time buyers. While the wealthier cohort of the millennials may be better positioned to buy a home, even those who successfully managed to scrape together some savings are facing dwindling chances of homeownership.
Owning a home is a traditional way of building wealth through equity, but the increasing cost of such an investment is eliminating the opportunity for many. This is particularly troubling for millennials, some of whom already have less wealth than past generations at their age. Losing housing as a wealth avenue could further widen the generational wealth gap between them and baby boomers, adding to the vicious cycle of millennial economic woes.
Homeownership is “going to be more difficult for millennials,” Cororaton said, adding that some of them were still dealing with debt.
Contractors need to ramp up new builds if they want to satisfy growing millennial demand, according to Jefferies — as many as 2 million new homes per year, maybe even more to fully repair the imbalance. Housing starts rose to 1.7 million in March, but Cororaton said building new homes was also the beginning of addressing the housing issue.
New-construction homes can be expensive for buyers. While an increase in supply would relieve pressure on prices, she said, down-payment assistance would be helpful. And when more homes are built, she added, we should allow for higher-density housing, which would mean changing zoning laws and regulations. But she said “that’s easier said than done.”
While builders are doing everything they can to build so they can take advantage of a hot housing market, Fairweather said, challenges like the lumber shortage, a lack of skilled labor, and shipping shortages — which affect the appliances that going into a home — aren’t helping.
“All the shortages right now are definitely not helping us figure our way out of the hole, but even without those challenges, the hole is humongous,” Fairweather said. “So it’s going to take decades of building lots and lots of homes.”