Prospective millennial home buyers are in worse shape than many feared, and it’s not just in their heads--it really is because of stiff competition from wealthy baby boomers, institutional buyers and private equity firms, all vying for the same shrinking inventory of smaller homes, according to a new study released today by Legal & General, a multinational financial services firm with $1.7 trillion under management.

The pandemic triggered a buying frenzy among all generations, but as baby boomers seek to “rightsize,” they are trouncing millennials (age 25 to 40), said the new study, U.S. Millennials and Home Ownership – A Distant Dream for Most.

“Just as the younger generation of home buyers is reaching the point in their lives when they want to buy a starter home, they are entering a market where, simultaneously, baby boomers are deciding to downsize, putting a strain on available housing stock,” the study reported.

Baby boomers have owned the majority of non-commercial real estate since 2001. They own 44% of homes, while Gen X owns an additional 31%, according to a Motley Fool study, and because they have time and cash flow that’s unavailable to the younger generations, they are able to pick up small, affordable houses as soon as they come on the market.

Only 43% of U.S. millennials are currently homeowners. This is the lowest homeownership rate of any generation and well below the overall average of 65%, the study found.

“The proportion of 30-year-old U.S. home buyers has gone down steadily with each passing generation—over half of baby boomers owned a home at 30, 48% of Gen Xers, and so far millennials are at the bottom with just 42%,” said the study's co-author, John Godfrey, Legal & General's corporate affairs director.

With longer life expectancies and better overall health than any generation in history, “boomers are not quite ready to give up on private homeownership—and with the horror stories about retirement homes and care facilities during the pandemic, this attitude becomes understandable,” he said.

Considering that homeownership is a fundamental way to build wealth, “it bodes poorly for millennials that affordable housing is becoming increasingly inaccessible to them. We should be meeting the demand by creating more opportunity, not less, for homeownership,” Godfrey added.

What makes matters worse is that private equity firms and institutional buyers are buying up significant swaths of smaller homes across the U.S.

“While millennials pin the blame on the older generations, a far less visible factor is the contingent of well-financed institutional buyers who have collectively taken a lot of stock off the market,” the study found.

“Private equity investors and iBuyers have, in fact, contributed to the shortage of housing by doing what businesses in free market economies do best: identifying rising assets and acquiring them in bulk,” according to the study.

To give some sense of the scale of institutional heft in the housing market, in 2020 iBuyers (including Zillow Offers, Opendoor, Offerpad, and others) collectively bought about 1% of the market share of all U.S. home purchases. Homeowners used an iBuying service to sell more than 15,000 homes. And 84% of the homes acquired by one of the four largest iBuyers were not listed for sale before they were bought.

Meanwhile, private equity firms accounted for one in every five home sales in the U.S in 2020, and that number is continuing to rise. It’s estimated that in some suburban neighborhoods, big private equity companies own 10% to 20% of residential property, Legal & General reported.

“During the pandemic, inflated housing prices left many smaller landlords looking to sell to PE firms for top dollar, while in the first quarter of 2021, corporate investors bought up 15% of all the homes that were for sale in the U.S. While time will ascertain whether this is an asset bubble, it is starting to look like a replay of 2006-2008, when everyone thought that home prices could only go up in value,” the firm said.

This time, however, rather than individual home buyers flipping homes, private equity firms and an online marketplace purportedly catering to individual buyers have been the less visible factor contributing to inventory shortages and a skyrocketing housing market.

“The severe shortage of affordable housing in the U.S., as well as the disproportionate amount of wealth held by older generations, significantly mirrors what we’re seeing in the U.K. Beyond older generations staying put in their own homes or being in a more competitive position to purchase starter-size smaller homes as they downsize, we see other market forces at work which are worsening the supply-demand imbalance,” Legal & General Group's Chief Executive Nigel Wilson said..

But there are fixes that can help younger buyers, 

“As part of the solution to this imbalance, we are building a larger stock of affordable homes for first-time buyers to purchase, as well as creating more opportunities for ownership through rent-to-buy programs in the UK,” Wilson added. 

The firm also recommends increasing the stock of affordable homes, including high-quality modular homes, rehabilitating the housing stock in smaller, more affordable cities and converting older commercial warehouses into living space.

“There are many ways to solve this crisis—we call on other companies like ours to follow a similar path forward that still achieves a high return on capital invested," Wilson said. "By developing solutions that will yield the broadest benefits for all, we can raise more boats, for millennials and the rest of society."