The only hope many younger generations have to accumulate wealth is to stay cozy with grandma. Since 1995 (over a decade before the Recession), the median wealth of 25-34 year olds declined 39 percent, while 35-44 year olds declined 27 percent, and 45-54 year olds’ wealth declined 15 percent. There have been potent gains reported from 2013 to 2016, but obviously not nearly enough to offset long-term losses. The main culprits are excessive student loan debt and the decline in homeownership rates. You might say the growth of student loan debt has heavily contributed to lowered homeownership rates. To me, the chart below demonstrates why down payments are harder for younger buyers to save up for.
According to the annual Harvard Joint Center for Housing Studies (JCHS) report (released today), households over 65 years old are the only age group that increased their homeownership rates when compared to 1987 (now 78.7 percent). Homeownership rates in all other age groups declined an average of 7.3 percent over the past 30 years. The older you are, the less likely you ever had student loan debt and certainly not at the steeply rising levels students have faced annually for over 30 years.
Wealth for most of us relies heavily on home equity. Post-Recession, from 2013 to 2016, average American household wealth rose 16 percent, largely due to home appreciation. Those owning a home saw wealth rise from $201,600 to $231,400 but during the same period, renters’ wealth dropped from $5,600 to $5,000. In other words, homeowners’ median net wealth rose a staggering 46 times that of renters.
All you wealthier downsizers moving from homeownership to renting (headache-free life) were left behind when you stopped owning. Household wealth in the top quarter of incomes was $710,000 for homeowners versus equally incomed renters’ wealth of just $116,900.
Of course this is also all if you’re white. Median white household wealth in 2016 ($162,800) was 10 times the median wealth of blacks ($16,300) and bested Hispanic wealth eight times ($21,400). That gap closes to 2.5 times when only homeowner households are measured.
The message? Regardless of race, buy a house, or inherit one from someone who has one. It’s even more important if you’re not wealthy because as the report notes, “Measured from 1989, $50 trillion of the $54 trillion gains in real household net worth went to the top 20 percent of households, while some $23.6 trillion went to the wealthiest 1 percent.”
Sure, you could point out that had you purchased a home in 2007, before the bubble burst, and then had to sell while underwater because of a job loss, you’d have been screwed. And you’d be absolutely right. But regardless of the Recession, had you held on (renting the home or rooms), you’d almost certainly be in a better position today because home prices in nearly all areas of the Metroplex now exceed the bubble’s highs.
Homeownership is a long-term commitment with trade-ups and downs. But getting on the property ladder and staying there is critical to gaining wealth from a deck miserably stacked against 80 percent of the population.
If you can’t afford one on your own, buy one with a roommate. Twenty percent of today’s renter households comprise of unmarried adults that have doubled in real numbers to 9.2 million households. If you can sign a lease together, why not a mortgage? Sit tight until the house appreciates enough to split the profit and buy your own.
What About All Those Apartments?
In 2017, Dallas led the nation in building permits, issuing 62,500 – 12,000 more than New York City and double Los Angeles. A lot of them were for new apartment buildings … but was it too many?
According to the Harvard JCHS report, in the second half of 2017, 180,000 fewer households rented, the first decline since 2004. This brought the share of renters down 0.5 percent between 2016 and 2017, but that half of a percent is misleading. During that year, households under age 35 dropped 224,000, which was offset by growth of 230,000 renters over age 65.
Two-thirds of renting households earned less than $60,000, and a third less than $25,000. However, in the past five years, apartment building has relied on strong growth in the luxury apartment market serving professionals earning over $100,000 a year. Certainly we’ve seen this trend all around Dallas with one luxe apartment building slapped up after another, unabated. But I wonder if the last year of luxury apartment move-in specials doesn’t signal a softening in the market (or a running out of tenants who can afford sky-high rents)?
Certainly, the amenity wars are being fought in the rental world, which only adds to lease payments (and may also be what’s attracting older tenants). For example, in 1990, 69 percent of apartment complexes had swimming pools. Today, it’s 86 percent of newer buildings. Ditto for in-unit laundry, where 89 percent of new units offer them compared to 61 percent of existing units. Measurements of high-end fitness facilities and spas, elaborate meeting facilities, media rooms, and any number of concierge services, while unavailable, would certainly show a similar trend.
Millennials, Millennials, Millennials
Whether due to student debt extinguishment, ever-higher rents or “Oh crap, I’m 30, I should buy a house,” Millennials are on the move, and there are a lot of them. Hardly surprising news comes from the 2018 Survey of Consumer Expectations which reports that if they could, 67 percent of renters would prefer to own a home (finances aside) compared to 19 percent who’d prefer to rent. Investment-wise, 61 percent of those same renters felt buying in their current ZIP code would be a good investment.
For the past three years, household formations have grown between 800,000 to 1.1 million each year. While these numbers are coming out of the Recession trough, it’s still 250,000 short of the typical 1.35 million a year seen in the lead-up to the Recession.
In 2011, when the Millennial wave was aged 20-24 years old, 25 percent lived on their own. By 2016, the (now older) group had grown their household percentage to 42 percent and in 2021 it will grow to 50 percent. Sounds good, but these numbers are slower than prior generations (student loan debt) and the numbers living with parents or relatives is at an all-time high and increasing – 26 percent aged 24-34.
As I said, there are A LOT of Millennials, so the slowing of household formation as a percentage of overall population is growing, the sheer numbers are driving overall increases in household formations.
There are no surprises here. Income inequality, racial disparity in employment and education, coupled with higher-cost housing, continues to put ever-more strain on tiny budgets.
Between 1987 and 2015, the government helped 950,000 more very low-income households. This sounds good until you realize those qualifying for government housing assistance grew by six million. As a nation we went from helping 29 percent to 25 percent during a period when population grew from 195 million to 327 million. From worse to worser.
In 2001, 31.6 million households spent more than 30 percent of their income on housing (defined as “cost burdened”). By 2016, that number grew 6.5 million to 38.1 million. The number paying more than half their income for housing grew by 3.6 million from 2001 to 2016.
Going back to the 1960s (and LBJ’s War on Poverty), 23.8 percent of renters were cost burdened. By 2016 the rate had doubled (the War on Poor People). All the explanation required is to understand that while median rents increased 61 percent, wages increased five percent.
Homeowners’ had better numbers, with median home values increasing 112 percent on the back of wage increases of 50 percent.
Not All Bad News (If You’re Not Poor, a Minority, or an Immigrant)
The Harvard report isn’t all doom and gloom. In fact, it shows a nation still digging out of the Recession in a number of ways. Millennials are throwing off their debt shackles (not Recession-related) and buying homes in ever increasing numbers. Housing starts, while still not where they should be, have nearly returned to normal (albeit with high land costs, labor shortages and trade wars to deal with). The over-rotation on apartments appears to be cooling as Millennial renters turn to home buying.
Finally, immigration has become a wild card. The US props up a declining birth rate with immigrants to eke out population growth (and so household formation). Recent moves by the federal government have caused the Census Bureau to cut the average annual immigration by 300,000 through 2035. One assumes their projected declines beyond the current administration are the negative comet-trail of US desirability – assuming the nation’s anti-immigrant fervor recedes with this administration.
That’s a lot less housing that will be felt disproportionately in high-immigrant states like Texas. Couple that with the construction trades’ outsized reliance on immigrant labor, and new construction costs won’t be stabilizing any time soon.
Remember: High-rises, HOAs and renovation are my beat. But I also appreciate modern and historical architecture balanced against the YIMBY movement. In 2016 and 2017, the National Association of Real Estate Editors recognized my writing with two Bronze (2016, 2017) and two Silver (2016, 2017) awards. Have a story to tell or a marriage proposal to make? Shoot me an email firstname.lastname@example.org. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.