TAKING SHELTER FROM MILLENNIAL HOUSING MYTHS

Transcription

1 FALL 2016 TAKING SHELTER FROM MILLENNIAL HOUSING MYTHS Millennials are different they don t want to own homes, they want to live in denselypopulated urban areas near their friends, they have too much debt, and they don t like responsibility. Or so go the feverish claims of many observers. We put the millennial generation under the microscope and find, contrary to homespun wisdom, they aren t so different from prior generations.

2 Taking Shelter from Millennial Housing Myths Among today s most popular certainties are the special characteristics possessed by a single demographic group: the millennials. Never are journalists, marketers, and analysts in short supply of insight into year-olds habits and preferences, perhaps because so many are themselves millennials or because they want to appeal to millennials. Anecdotal evidence often passes for analysis. As skeptical economists who deride anecdotes, we decided to examine these claims. Below we bust two myths about millennials and housing. Whether or not our conclusions agree with your young cousin s experience, we introduce data on homeownership and student debt. In doing so, we hope to show that the certainty with which many opine on a subgroup in the global economy rests on little more than convenience. First, though, the above claims do seem to have some grounding in fact. Homeownership rates across the western world have reached decadal lows. Census Bureau data show that homeownership in America hit a high of 69% in 2004 but has since plummeted to 63%, the lowest level since Arm-chair demographers also point to explosive rent growth in urban areas as more evidence that millennials don t want to own homes and would prefer to rent. Shock and awe headlines from the Daily Mail proclaim, Generation Rent hit by a new surge in prices. 1 In San Francisco over the last five years, rental prices have jumped 3.9% on average, per year. Some point to such rapid price appreciation as evidence of the insatiable millennial demand for rental housing. NO HOMIES One of the most common myths we hear about millennials concerns their unique shelter preferences. They don t want to own homes, people say. Instead, millennials want to live in urban centers with their friends. Or millennials still live with Mom and Dad because they can t find good jobs. These arguments and many similar variants are in our crosshairs. fig. 1 MAKING HOUSES HAPPY HOMES, EVEN FOR MILLENNIALS Now comes the skepticism. Yes, homeownership rates are low, and yes rental prices have boomed. We think it wise to contextualize these phenomena before pronouncing millennial homeowners down for the count. ZERO STUDENT LOAN BALANCE OR A $50,000 STUDENT LOAN BALANCE: THE PROBABILITY OF HOMEOWNERSHIP DOESN T CHANGE MUCH 90% 80% $0 Student Loan Balance $50,000 Student Loan Balance Among those with college degrees, the probability of homeownership only decreases marginally as student debt levels rise Probability of Home Ownership 70% 60% 50% 40% 30% 20% 10% 0% Source: Zillow Research No Degree Associate's Bachelor's Master's Doctorate 1

3 $160,000 $140,000 fig. 2 AS THE LEVEL OF EDUCATION RISES, SO TOO DOES THE AVERAGE STUDENT LOAN BALANCE. DON T WORRY TOO MUCH ABOUT THE DEBT FOR THOSE WITH YEARS OF SCHOOLING. Average Income Average Student Loan Balance $141,774 $120,000 $100,000 $80,000 $82,107 $106,535 $90,786 $60,000 $40,000 $20,000 $0 $38,383 $3,962 $59,247 $9,988 $22,722 $42,014 No Degree Associate's Bachelor's Master's Doctorate Highest Household Degree Source: Zillow Research, Panel Study of Income Dynamics, public use dataset. Produced and distributed by the Survey Research Center, Institute for Social Research, University of Michigan, Ann Arbor, MI (2016). Consider that survey data disproportionately show millennials want to own homes. In a recent poll conducted by the Urban Land Institute, Fully 70 percent of [millennials] expect to be homeowners by The response to this question five years ago was almost as high [at] 67%. 2 This datum describes an important point. Millennials preference for homeownership is strong, just like the generations before them. «IN A RECENT POLL CONDUCTED BY THE URBAN LAND INSTITUTE, FULLY 70 PERCENT OF [MILLENNIALS] EXPECT TO BE HOMEOWNERS BY 2020.» As for the many suggestions that millennials only want to live in cities? A National Home Builders Association survey found that 66% want to live in the suburbs, 24% want to live in rural areas and 10% want to live in a city center. 3 Evidence runs deeper than surveys, though. A glance at the most recent Census Bureau data shows that 1.9 million millennials moved out of cities into the suburbs, while only 1.3 million millennials moved out of the suburbs into cities. What is more, Census data suggest that since 2000, older millennials are less likely than previous generations to live in urban areas. The myth of unique millennial shelter preferences bursts as soon as one looks at the data. Yes, specific millennial cohorts, such as collegeeducated young people, are increasingly moving to cities. But these people are the exception and not the rule. Comprehensive survey data and migration statistics demonstrate that millennials preferences for shelter do not look much different from the generations that came before. DO NOT BET AGAINST STUDENT DEBT Millennials balance sheets do look very different from earlier generations. Rising college tuition and graduation in the depths of a recession have meant that the liability side of many millennials balance sheets has expanded rapidly. Since 2004 most segments of household debt have increased at a measured pace, on average about 3% per year. Student loans have jumped nearly 14% per year for more than a decade. A portion of the rise in student loan debt is because, over the same period, the price of college tuitions and fees has averaged annual increases of 5.2%. That coupled with a difficult job market and the loss of household savings during the recession, and we can cook up a high growth rate in student debt. So far, so factual. The problem arises when would-be analysts extend their student loan reasoning to the housing market. The dramatic expansion of student debt, they claim, is the primary reason that young homeowners cannot access the market. Their balance sheets are already too encumbered, and banks will not extend credit. TESTING STUDENTS BORROWING CAPACITY There are two observations that invalidate the suggestion that student debt is keeping millennials out of the housing market. The first is that student loan debt tends to rise with future earning power. Thus, those borrowers with the most debt are often those with the most capacity to repay. Second, nearly all borrowers millennial or not have had a harder time obtaining a mortgage. 2

4 fig. 3 THE LARGEST STUDENT BORROWERS, THOSE AT-FOUR YEAR SELECTIVE INSTITUTIONS, HAVE AMONG THE LOWEST DEFAULT RATES Aggregate Federal Student Loan Debt by Institution Type, Five-Year Default Rate by Institution $1.2 $115B Graduate Only Graduate-Only Borrowers $1.0 $260B Selective 4-year Most Selective 4-Year Trillions of USD $0.8 $0.6 $0.4 $270B $175B Somewhat Selective 4-year Nonselective 4-year Selective 4-Year Nonselective 4-Year $0.2 $117B 2-year Public 2-Year $189B For-Profit For-Profit $ % 10% 20% 30% 40% 50% Source: Looney A. and C. Yannelis (2015)."A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising loan defaults." We should note outright that there is some evidence to suggest that higher student debt reduces the probability of homeownership. Our conjecture, supported by Zillow analysis, is that the effect is much smaller than most people assume. Indeed, increases in student loan balances for those with bachelor s degrees only lowers the probability of homeownership by 4% (see Figure 1). In other words, even if some millennials are less likely to own homes because of their student debt, the argument only applies under specific circumstances. To deepen the conversation beyond the simple assumption that more student debt prevents homeownership, we must acknowledge that not all student debt is created equal. A $50,000 loan balance for a student in medical school is meaningfully less relevant for prospective homeownership than a $50,000 loan balance for a student who dropped out of a for-profit online school. To see why this is true, we must think not only about the amount of debt assumed by a student but of the kind of education to which the debt is applied. Most important, higher levels of education correlate well with higher lifetime earning power. Thus even if students assume more debt as they climb higher on the educational ladder, we ought to worry less about their marginal dollar of debt impacting homeownership (see Figure 2). The College Board report on the distribution of student debt does not mince words. Graduate students and undergraduates who borrow to attend selective colleges have the largest debts and the lowest default rates. Students who attend for-profit and public two-year colleges have the smallest debts and the highest default rates. 4 3 Figure 4 contains information on the total amount of debt outstanding (and the five-year default rate) of student loans by the kind of institution. The borrowers with the highest default rates (2-year and forprofit) only account for 25% of federal student loan debt outstanding. Four-year and graduate school borrowers, while they account for 75% of all federal student debt, have much lower five-year default rates (see Figure 3). «NEARLY ALL BORROWERS MILLENNIAL OR NOT HAVE HAD A HARDER TIME OBTAINING A MORTGAGE.» Another reason loan balances alone do not contain much information regarding the probability of homeownership is that students with loans who graduate are much more likely to repay their debt. In 2015, only 2.8% of those with bachelor s degrees were unemployed, compared to 5.4% of those who only possessed a high school diploma. What is more, the median usual weekly earnings of someone with a bachelor s degree were nearly twice as much as someone without ($1,137 compared to $678). 5 Any claims about the relationship between student loans and homeownership ought to be moderated by considerations not only regarding the level of education achieved but also regarding the general state of housing credit. Simply asserting that millennials cannot buy homes

5 because they have large student debt balances misses more important causal factors that have contributed to lower post-financial crisis homeownership rates. IT AIN T STUDENT DEBT; IT S THE BANKING SYSTEM, STUPID After a generational housing boom and bust, it shouldn t be surprising to learn that mortgage lending retrenched. The volume of applications for mortgages to purchase a home doubled from 1997 to 2005, and then dropped by nearly 70%. The first thing to note is that it isn t only millennials who haven t been buying houses Americans have been buying fewer houses. What is more, tighter post-crisis bank lending standards have meant that young borrowers, without much credit history and an established career, will have a harder time obtaining a loan. Where a run-of-themill mortgagee had a FICO score of ~720 before the crisis, after 2008, those who ve successfully accessed mortgage loans have FICO scores closer to ~760. Tighter mortgage lending conditions narrow the pool of borrowers who might qualify for a loan. Of all 130 million American mortgage loans, 68 million (52%) would be unaffected by the change in lending standards (see Figure 4). However, for the 21 million borrowers with credit scores between 701 and 750, finding financing for a home purchase is more difficult today. And it isn t the case that large student loan balances are driving millennials FICO scores lower. As long as a young graduate makes her payments on time, her credit history can benefit from having an installment student loan on her credit report, because responsibly managing it demonstrates that she has experience dealing with different types of credit. 6 Indeed, one-fifth of all borrowers with more than $50,000 worth of student loan debt have FICO scores higher than 750. «THE FIRST THING TO NOTE IS THAT IT ISN T ONLY MILLENNIALS WHO HAVEN T BEEN BUYING HOUSES AMERICANS HAVE BEEN BUYING FEWER HOUSES.» Tighter mortgage lending helps explain recent trends in homeownership across demographic groups. And it isn t the case that millennials Weighted Average Fannie Mae Conforming Loan Borrower Credit Score fig. 4 NO CREDIT WHERE CREDIT IS DUE? THE AVERAGE FICO SCORE FOR HOME BUYERS HAS INCREASED BY 30+ POINTS SINCE THE CRISIS Pre-Crisis Average Source: Fannie Mae 4

6 with large student loan balances are unduly impacted from a credit score perspective. MYTHS BUSTED Making blanket statements about generational preferences is dangerous. As demonstrated above, there is little in the way of facts to support claims that millennials have radically different preferences when it comes to homeownership. Much of the evidence that people use to support such claims, while independently correct, isn t helpful in explaining the behavior they wish to understand. Homeownership has fallen, rental prices are higher, and student loan balances are larger. These are all true. The central myth, though, is that these features of our world are the product of generational preference. SOURCES 1 Sculthorpe, Tim (Feb 2016). Generation Rent hit by a new surge in prices as charges race away from wage increases and inflation. Daily Mail 2 Lachman, M. Leanne, and Deborah L. Brett. Gen Y and Housing: What They Want and Where They Want It. Washington, D.C.: Urban Land Institute, Hudson, Kris ( Jan 2015). Generation Y Prefers Suburban Home Over City Condo. WSJ.com 4 College Board (2016). Trends in Student Aid Bureau of Labor Statistics. Earnings and Unemployment Rates by Educational Attainment, Havens, Kelsey (Dec 2015). How Student Loans Affect Your FICO Scores. FICO Blog 7 Kolko, Jed (2014). Real Estate: Housing Builds a New Foundation. Milken Global Conference Panel A larger lesson might be drawn from our millennial myth busting. Especially in Anglo-Saxon housing markets, the first decade of the twenty-first century saw an unusually volatile housing market cycle. The highs and lows were historic. Reasoning from any one data point during that period would have been useless. We conclude by suggesting that in any market, at any time, when in the midst of extreme cyclical movements, investors should refrain from pronouncing massive changes in preference. It is not to say that preference change does not occur. Suburban housing is more preferred today than it was 50 years ago. We only counsel, in the words of Indeed.com s chief economist Jed Kolko, be cautious [when calling] big changes in preferences in how people want to live and where people want to live trends should be presumed cyclical until proven structural. 5