Americans in their 20s and early 30s are getting a nudge toward homeownership a decade after sales peaked during the housing bubble. It’s not their nagging parents. It’s rents. They’ve risen so much that buying is making more sense.
“I pay $1,410 in rent for my one-bedroom apartment in downtown Denver,” said Eric Arther, 28, who has saved about $30,000 for a down payment. “If I pay that much, I’d like to build some equity.”
Expect the open-house crowds to skew a little younger during this year’s spring homebuying season. Millennials made up 32 percent of the U.S. housing market in 2014, up from 28 percent two years earlier, and have pulled ahead of the older Generation X as the largest segment of buyers, according to the National Association of Realtors.
Purchases by younger buyers are likely to grow gradually as millennials work through hurdles such as student debt, lack of down-payment funds and later family formation than previous generations, according to Jed Kolko, chief economist for real estate website Trulia, a unit of Zillow Group Inc.
“We are at the beginning of a multiyear period where more young people become homeowners,” Kolko said in a telephone interview. “But I think it will happen more slowly than most people expect.”
First-time buyers made up 29 percent of existing-home sales in February, up from 28 percent in January and the first increase since November, the National Association of Realtors reported this week. The share of new buyers fell last year to its lowest level since 1987, according to the group.
About 5.2 million renters say they expect to purchase a house in 2015, up from 4.2 million a year earlier, a reflection of the improving economy, according to the Zillow Housing Confidence Index released this month. The share of renters aged 18 to 34 who want to buy grew in Atlanta, Chicago, Dallas, Detroit, Las Vegas, Minneapolis, Phoenix, San Francisco, Tampa and Washington, areas where job growth has been strong, according to the survey of 10,000 households in 20 cities.
While limited inventory, tight credit and down-payment requirements make it hard for many millennials to achieve the American Dream, soaring rents and the likelihood the Federal Reserve will increase interest rates later this year may drive more of them to explore buying, said Stan Humphries, chief economist at Seattle-based Zillow Group.
Humphries said he expects rent increases to outpace price gains by the end of the year as higher mortgage rates limit affordability and the rental market remains tight. The U.S. rental vacancy rate hit a 21-year low at the end of last year, according to the Census Bureau, giving landlords leverage to charge more.