Do you want to buy a home in your lifetime?

Do you want to buy a home in your lifetime??

If the answer is yes, you’re likely feeling some mild doom and gloom associated with that question, as it is a goal that feels less and less within reach (and even if the answer is no, you still will want to read on).?

Last week, I talked all about the outlook of the housing market and where it leaves young, prospective homeowners and renters alike. And no surprises here: the landscape of housing is just about as inhospitable as it has ever been. But that doesn’t mean all hope is lost.

This week, I chatted with Jung Hyun Choi, Principal Research Associate at the Urban Institute about how she sees the state of the market, and if housing really is as inaccessible as it seems for younger generations. From policy solutions to individual workarounds, there’s a lot going on that we should be hopeful about—but if anything, the housing affordability crisis needs to stay top of mind in order for change to occur.?

1. What’s the landscape of housing for young adults look like now???

“When I first joined Urban, there was a discussion that maybe Millennials are different; they don't really want to buy a home. Maybe they really want to live in the core urban area, and they think about homeownership in a different way. But research still shows that the preference towards homeownership hasn't really changed—they were just in an economic situation where the unemployment rate was substantially high and there was a lack of affordable housing, which prevented them from purchasing a home in their prime homebuying years.?

During the pandemic, when the interest rate felt historically low, a lot of the young homebuyers were finally able to enter into the home market. There was a disproportionately higher share of younger homebuyers in the housing market in the late 2020 - 2021 period, but that shifted quickly with the rise in interest rates. So what happened was that buying a home became exceedingly difficult—because of the rising interest rates, and because that discouraged existing homeowners who are benefiting from that historically low interest rate to move. So new supply in the housing market became significantly reduced.

With existing homeowners not moving, there's a lack of affordable housing supply in the market, and the rate is so high. And that means we have seen a significant drop in mortgage origination. A housing market in that environment really prevents a lot of Gen Z who have entered into their prime, homebuying years to become homeowners.

A lot of people actually do start off as a renter when they move out. Previously, around one fifth of the population started [in the housing market] as homeowners, but that number has dropped. We looked into if young adults stay longer with their parents, if that will help them to step up more and become a homeowner relatively faster than those who started as renters. But in our past data, we don't really see that happening . So it seems that this affordability crisis is delaying people from moving out of your parents’ house and starting off as a homeowner.”?

2. What are the solutions??

“This is an area that needs both supply and demand-side solutions. The interest rate shock is determined by the Fed—so even if policymakers want to fix the current shock in the market, it will take time. Right now, there are some prospects that the interest rate will be going down a little bit in the future, as indicated by the job market status. That will alleviate some of the burden in terms of affordability, but we do need to build more housing in the market. So we have both the supply side and the demand-side solutions. Supply-side solutions include providing tax subsidies to build more single family homes geared towards affordable housing for young adults. Tax support currently leans towards the rental market—low income tax credit, housing tax credit—and that could be expanded to affordable single family units. There are a lot of efforts to change the zoning and land use regulations to build more affordable housing, increase manufactured housing supply, and [Accessory Dwelling Units]. But it takes time to build housing. So even if they move fast with building housing, it's not going to be a solution within the next year.

So we need some demand-side policies. There has been some debate [about this], because if we try to push through demand-side policy without really strategically thinking about how to best target it, there will be push back—on the idea that it’s only going to increase the prices, because you're just increasing the demand. The current administration is thinking about how to better target these demand-side solutions, and one of the things that we have looked at, for example, is down payment assistance geared towards young adults who do not have home-owning, wealthy parents who can support their down payment. One of the interesting things that we see in young adults’ access to homeownership is greater inequality within their generation—depending on whether they can get parental support or not. Some studies have found that on average, although Millennials or Gen Z are worse off in terms of wealth compared to the prior generations, the top 20% of millennials are actually doing better than the top 20% of Baby Boomers or Gen Xers. That's because they are able to get sufficient support from their parents, and homeownership is one of those things where getting a lump sum of support can really help to start. There's this intergenerational wealth transfer, which can really exacerbate inequality within the generation if the access to homeownership differs immensely by whether you have resources or not. So we need to target some of the down payment assistance toward those who do not have home-owning parents. Additionally, some people have thought about whether they could provide a tax-free savings account to build for future down payments. This isn’t going to affect the demand, but it can help them to build some savings for future buying opportunities.

The other thing we've been looking at, which I think there's been growing research interest on, is whether rental payment can be used in mortgage underwriting. Right now, only about 5% or less of rental payments are being reported to the credit bureaus. So that means that your credit score does not reflect whether you paid your rent on time. A lot of young adults are renters, and even if they make consistent rental payments, that behavior is not helping them to access the mortgage market, because that's not used in mortgage underwriting. So there have been some pilot programs that have started, to reflect the on-time rental payment in the mortgage underwriting space—but that's very, very limited. The rental payment into mortgage underwriting is a way to help young adults build credit and have better opportunities to access mortgages, but also to potentially lower the costs of mortgages—because they can build that up credit using their positive rental payment history.”

3. What’s one bold prediction for the future??

“I would like to stay positive, but the thing that concerns me about housing is how it's currently exacerbating the wealth inequality in the U.S. market. And what we found in the most recent data is that the wealth gap between renters and homeowners has reached a historic high. I worry that if this continues, if we still have a lack of supply, and it's becoming more and more difficult for young adults to access homeownership, then I worry that those who can benefit from parental resources will have a head start—which would exacerbate the wealth inequality moving forward. So we do need policies to equal the playing field and help those people who have fewer resources have opportunities to access homeownership and sustain homeownership. For the older generations, there were certainly a lot of barriers and historic discrimination—but for the most part, access to homeownership was based on their own efforts and hard-work. Now, it feels more like it depends on luck, and who your parents are. There’s been a shift between effort and luck, and it seems that luck is playing a larger role in the current market situation. This is unhealthy for a society overall, so hopefully we can put more policies in place to shift that around.”

The long and short of it:?

1. Home ownership preferences haven’t changed, but access to affordable housing is becoming increasingly limited due to high interest rates, and a lack of supply.
2. Solutions will come at the hand of both supply and demand-side solutions. Demand-side solutions need to be targeted in order to effect change, and to combat the inequalities in intergenerational wealth transfers.?
3. Housing inequality can lead to greater wealth inequalities within generations if left unaddressed. The housing market has shifted away from accessibility based on hard work and effort, and shifted towards luck and familial wealth. Additional assistance programs targeted toward first-gen renters or buyers can make a difference.?