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Blog: Prices lock millennials out of homes

Freddie Mac recently presented a theory as to why the homeownership rates for younger Americans aren’t what they once were: Higher home prices have been far and away the primary factor locking people out of the housing market.

Freddie did statistical modeling on economic and demographic data from 2000 to 2016 to determine why the national homeownership rate for people under the age 35 has fallen 8 percentage points from the peak in 2004, and remains about 3 percentage points lower than the historic average.

fredbloghomeAccording to the U.S. Census Bureau, as of the first quarter, the homeownership rate was hovering around 35 percent for people under age 35. 

Housing costs are the biggest problem for young, would-be buyers, and one that accounts for more than 50 percent of the reason for the lower homeownership rate, according to Freddie.  

Freddie estimated that 700,000 young adults were prevented from buying a home in the 2000-2016 period because of the cost. This includes both home prices, which have raced well ahead of the growth in incomes, as well as rents. Higher rents make it harder to save money for a downpayment for a house, for example.

Another major factor keeping younger people on the sidelines is that marriage and fertility rates have declined. In other words, you are more likely to buy a home when you get married and have kids, and people are waiting longer to do that. Freddie said lower marriage and fertility stopped roughly 322,000 young adults from taking the leap into homeownership.

Other factors include age and race, geography, income and employment. Minorities and foreign-born residents, for example, have lower homeownership rates. Minorities now represent a greater share of the population under the age of 35 than in the year 2000, according to Freddie's analysis. Younger people have also been migrating into big cities, where home prices are higher.  

Freddie said not all the causes could be measured in its model. Some lesser factors keeping people out of the market likely include such things as personal choice, credit worthiness and student debt.

Freddie predicted that the homeownership rates would increase modestly through 2025, but remain under the historic average.

“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, Freddie Mac’s chief economist. “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.”


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