With apologies to the British: The king (baby boomers) is dead; long live the king (millennials).
Yes, the almost-50-year and mostly glorious reign of the baby boom leading the housing industry is over. This is the generation—my generation—that triggered the biggest rental apartment building boom in history in the early 1970s, brought housing out of its early ’80s slump by buying starter homes, and then from about 1990 on couldn’t seem to stop buying big, fancy move-up houses that came to be called McMansions.
And, yes, while the Great Recession spoiled some of the fun, for about 50 years boomers created enormous demand for housing. But now the youngest boomers are 55, the oldest 72. Sure, they’ll still buy houses, but now it’s time for the even bigger generation of millennials to drive housing demand—if only builders would give them a fighting chance.
As it is, builders, most of whom are boomers, have all sorts of misplaced misgivings about millennials. For example:
- Too many builders think most 25- to 34-year-olds still live with mom and dad. In fact, about 30% do. But they’re moving out in big numbers, which is why there will be 1.5 million new household formations this year, the highest number in more than a decade.
- Too many builders think millennials, who watched housing values collapse during the Great Recession, must see housing as a bad investment. But, according to new research from Zillow, more young adults than boomers see buying a house as a good investment. (And they see housing as a better investment than stocks and bonds.)
- Too many builders think millennials want to rent, not buy. But, even though millennials have supported a robust rental market for the past five years or so, it’s flat-out wrong to think they don’t want to be homeowners. In fact, according to new research from Metrostudy, millennial buyers already make up about 40% of resale buyers and slightly more than 50% of new-home buyers.
So millennials are already buying lots of new houses. They’d buy more if only builders were building more lower-priced housing. As it is, about 70% of the new homes purchased by millennials cost less than $400,000, according to Metrostudy. In the meantime, however, NAHB’s chief economist Robert Dietz says the market share of new homes costing less than $300,000 has dropped from 80% in 2002 to 40% this year.
There is clearly a disconnect between demand and supply when it comes to millennials and builders. I get it. It’s hard to find affordable land. It’s hard to get approvals to build at the higher densities that affordable housing often requires. It’s hard to keep costs down when labor and material prices keep ratcheting up. And it’s hard to stop building expensive, high-margin McMansions for boomers and instead start building lower-priced, lower-margin houses for millennials.
But stop you must. At least that’s the case if you want history to repeat itself and have millennials, like the boomers before them, to set the housing industry off on a long run of success. The king is dead; long live the king.