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Residential Department: BackSpace: May 2018

 

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Millennials may find alternate paths to homeownership

Single-family home prices are rising nationwide, and the market segment experiencing the sharpest price increases is entry-level homes, which often prove most attractive to millennials. That generation, born between the early 1980s and 2000, has comprised the largest share of U.S. homebuyers since 2013, and two-thirds of these buyers are purchasing their first homes, the National Association of Realtors (NAR) says.

Entry-level homes — defined as those with a purchase price of less than 75 percent of their local area’s median price — were 9 percent more expensive year over year as of this past January, according to a CoreLogic report. Entry-level home prices grew 3.7 percentage points more over the 12-month period than prices in the highest-valued tier of homes — those worth more than 125 percent of the area median price.

Millennials already face rising interest rates as well as higher levels of student loan debt than prior generations. Ballooning entry-level purchase prices for homes, then, are yet another disincentive for millennials who wish to own, rather than rent, a home.

“Millennials have the same desire to be homeowners as their parents,” says Frank Nothaft, chief economist at CoreLogic. “However, they recognize or believe they’re going to achieve homeownership at a later age than their parents.”

Still, home purchases continue to be popular among all age groups, and price growth doesn’t appear to be hampering sales. According to NAR, single-family home prices increased this past third quarter in 92 percent of the 177 metro areas it measured. Still, more than 5.5 million home purchases were made nationwide in 2017, an 11-year high.

More than one-third of the nation’s 100 largest metro areas, as measured by housing stock, were considered overvalued as of this past January, CoreLogic reports, meaning their average purchase price was at least 10 percent higher than long-term sustainable levels. This may be fueling an emerging trend of employees in high-tech industries migrating from more expensive coastal markets to inland markets, says Daren Blomquist, senior vice president at Attom Data Solutions.

Compared to other age groups, millennials have a higher appetite for relocating. They were 50 percent more likely than non-millennials to choose a job in another region in 2016, and high-income industries such as software, health care and financial services were the most popular among millennial job switchers, according to a LinkedIn report.

Attom Data Solutions found that 10 metro areas saw double-digit home-price appreciation in 2017. Buyers relocating from an overvalued market may be willing to pay significantly more than the asking price in a reasonably priced market, Blomquist said, pushing purchase prices higher in some nontraditional places.

“A place like Kansas City [Missouri] or Nashville [Tennessee] looks like an amazing bargain,” Blomquist says. “Those two cities, which were kind of surprising to me, were two of the top-five performers in terms of biggest home-price appreciation in 2017.”

A typical townhouse is a little less than 2,000 square feet and so that kind of hits the sweet spot, particularly when we think about millennial homebuyer preferences. 

Millennials leaving West Coast markets also have made Texas a popular destination, Nothaft says. “Austin and Dallas, in particular, are two markets that kind of have a vibrant local economy and expansion of tech-centric employment,” he notes. “Compared to living in San Francisco, Seattle or Los Angeles, house prices are a lot lower.”

Overall, however, homeowners appear reluctant to move. The average homeownership tenure of eight years in 2017 was nearly double the average rate from 2000 to 2008, Attom Data Solutions reports.

Fewer people moving, naturally, leads to fewer homes for sale. The nationwide inventory shortage is a well-known issue and new construction could be a way to address the shortage, but homebuilders aren’t keeping up with demand, says Robert Dietz, chief economist at the National Association of Home Builders.

Labor shortages and rising costs for building materials are the two major challenges for the homebuilding industry in 2018, Dietz says. The median age for construction employees has surpassed 40 and the industry has yet to fully recover from the Great Recession, with builders replacing only about 800,000 of the 1.5 million workers lost during the downturn, Dietz says.

“There is a challenge there because you’ve got to recruit that next generation of construction workers,” Dietz says. “That’s an education and outreach item. It’s about worker training. It’s about working with community colleges and trade schools.”

There are opportunities for builders to reduce costs and more closely meet housing demand, Dietz says. One path is modular homes, which involve factory-built construction and some rough assembly at work sites. Modular homes comprise about 3 percent of single-family starts but are likely to grow in the coming years. Additionally, smaller footprints have become a trend in new-home construction over the past couple of years, Dietz says.

“Some of it is growth in townhouse construction,” Dietz says. “Townhouses make up about 12 percent of single-family starts. … A typical townhouse is a little less than 2,000 square feet and so that kind of hits the sweet spot, particularly when we think about millennial homebuyer preferences.”

Although they represent an increasingly small slice of the housing market, distressed homes — including real estate-owned (REO), short-sale and foreclosure properties — may be a viable path to first-time homeownership. REOs were 6.2 percent of all single-family home and condominium sales in 2017, Attom Data Solutions says, down from their peak of 24.7 percent eight years earlier.

The typical REO home sold for about 15 per-cent less than market value. And there were 12 metro areas — mostly in New York, Pennsylvania and Ohio — where the share of REO sales increased last year, and the average discount was at least 30 percent below market value.

“Nationwide, we’re seeing distressed sales at a 10-year low,” Blomquist says. “However, that said, I think a great opportunity for first-time homebuyers, millennials, to get their foot in the door, is [by] buying a bank-owned home or a foreclosure.”  


 

Neil Pierson is editor in chief of Scotsman Guide Media. Reach him at neilp@scotsmanguide.com or (800) 297-6061.

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