Millennials are the largest living generation, however, according to Freddie Mac’s March Insight report, they are falling short of dominating the housing market.
Freddie Mac’s latest report examines the young adult generation, Millennials, or those born from about 1980 to 1994. With the youngest Millennial turning 24 this year, many are beginning to wonder what’s keeping the largest generation since the Baby Boomers from entering the housing market, and what will happen when they do.
As of 2016, there were about 45 million young adults aged 25 to 34 in the U.S., which is four million more than those aged 35 to 44, according to the U.S. Census Bureau. Freddie Mac explained that a population of this size should be fueling the housing market. There’s just one minor problem.
The headship rate.
The headship rate, or percentage of those heading a household, among young adults age 25 to 36 was down 3.6 percentage points in 2016 compared to 2000. If Millennials formed households at the same rate seen in 2000, this could have resulted in 1.6 million additional households in 2016.
But while household formations, or the lack thereof, could seem to be holding Millennials back from entering the home buying market, Freddie Mac suggested it could actually be the other way around. The GSE’s research indicates the two biggest factors explaining the decrease in household formation rates are housing costs and labor market outcomes.
From 2000 to 2016, real median home prices increased by 29%, but young adult per capita real incomes increased only 1%.
However, the household formation rate could soon drastically increase, bringing a new wave of demand to the housing market. Freddie Mac explained that even if later than previous generations, Millennials should soon begin to enter the housing market at a higher rate. It forecasts that Millennials and the following generation, Generation Z, could add somewhere between 19 and 21 million additional new households by 2025.
“We expect that as life progresses and today's young adults age, they will add around 20 million households to the U.S. economy, driving housing demand over the next decade,” said Len Kiefer, Freddie Mac deputy chief economist. “But, housing costs are a major factor holding back young adult household formations.”
“Our research results indicate that 28% of the decline in young adult household formation is due to housing costs, Kiefer said. “If housing costs continue to rise, we could see about 600,000 fewer households over the next decade.”