Mortgage Lending Snag: Boomers & Millennials Vie for the Same Houses

Baby Boomers want to keep their independence by downsizing to smaller homes, but that conflicts with Millennials’ aspirations for first-time ownership. Compounding the situation are investors buying smaller properties in bulk. Mortgage lenders need to factor this complex dynamic into their planning.

There is a mortgage battle going on pitting aging but healthy elders against their Millennial offspring. It’s likely that not a few conversations between family members around holiday tables have heated up along the following lines:

  • Baby Boomer parents are paying top dollar to downsize their living quarters from big family homes into the smaller houses that their grown-up children would otherwise buy as their entry into homeownership — thus shutting the latter out of the market and hindering their ability to establish wealth.
  • On the other hand, the parents often subsidize or outright buy homes for their children in order to get them started.

A study by Legal & General, a multinational financial services and asset management company, characterizes the situation as “a quasi-war going on between U.S. Millennials and the generation representing their parents and grandparents. And it’s being waged on the housing front.”

While highlighting this tension, the report adds a third dimension: “Private equity investors and iBuyers have, in fact, contributed to the shortage of housing by doing what businesses in free market economics do best: Identifying rising assets and acquiring them in bulk.” (The home valuation website Zillow defines an iBuyer as “a real-estate investor that uses an automated valuation model.”)

How the conflict will turn out is yet to be decided, but it’s clear that this dynamic situation heralds potentially fundamental shifts in demographics, geographic dispersal, and even advanced construction technology. Clearly it could impact the planning of mortgage lenders, not only in terms of volume, but types of products.

The Boomer Impact

According to data from Zillow the median age of someone who bought a home rose from 40 in 2009 to 44 in 2019. The share of recent buyers who are 60 years and older grew 47% from 2009 to 2019. Over the same period the share of recent buyers age 18-39 fell 13%.

“There are many hurdles Millennials must overcome when buying homes of their own, one of them being fierce competition from the next-most-populous generation, Baby Boomers,” says Jeff Tucker, senior economist at Zillow. “Whether downsizing or moving to a new town, Baby Boomers being more active means competition that previous generations did not have when buying their first home. And older buyers have the advantage of a lifetime’s worth of savings and home equity to leverage in a competitive offer.”

Key Point:

Young adults’ share of the homebuyer market fell sharply as Boomers and investors became more active.

More than half of homes sold in July 2021 went for above their listing price, the Zillow report says. U.S. home values grew 31% from 2009 to 2019, and they’ve grown an additional 22% since then.

“Boomers are not quite ready to give up on private home ownership — and with the horror stories about retirement homes and care facilities during the pandemic, this attitude becomes understandable,” says the L & G report.

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Millennials Start to Take it Personally

At 75 million people the Millennial generation is America’s largest, according to a Brookings report. The generation is defined as those born between 1981 and 1996. They are in prime homebuying years, but the L & G survey says only 43% of U.S. Millennials are currently home owners, well below the overall average of 65%.

“To put this in perspective, 42% of 30-year-old Millennials own their own homes, as compared with 48% of Gen Xers (now 41-56) and 51% of Baby Boomers (now 57 to 75) who owned homes when they were 30 years old,” the report says.

This is starting to rankle the Millennial generation of homeowner aspirants. As one respondent to the L & G survey said, “Boomers need to stop buying starter homes as their retirement homes. It’s driving the cost up to where first-time home buyers can’t afford it.”

The catch, though, is that it is not as if the older generation doesn’t care about the Millennials’ plight. A 2018 L & G study found that most older respondents acknowledged that it is harder for Millennials to save to buy a home, and among those, the top reason was that property prices have risen to a point where they are unaffordable. “And 35% of the younger people we talked to in that survey said that without funds received from parents and grandparents they would have had to delay their home buying plans by three to five years,” the current report states.

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Highly Active Investor Market

There is more to the story than Boomers vs. Millennials. “A far less visible factor is the contingent of well-financed institutional buyers who have collectively taken a lot of stock off the market,” says the L & G survey. According to a Motley Fool Millionacres blog, “Low inventory is pushing prices up, meaning Americans are battling affordability concerns, and real estate investors and private equity firms aren’t making it any easier.”

Notable Trend:

One in five homes were sold to investors in 2020, according to Motley Fool, a number that will likely increase.

“In 2019, real estate private equity firms raised $179.4 billion and after a cautious 2020, investment firms have a lot of cash sitting idle,” the Millionacres blog states. “Low interest rates mean borrowing costs are down, but now the firms are facing inflationary pressures, meaning putting money to work is critical.”

Not only are such firms attacking the market, they are being selective as they do it. “Investors … are really buying up the stock of relatively inexpensive single-family homes built since the 1970s in growing metro areas,” says an article in Slate. “Investors are depleting the inventory of the precise houses that might otherwise be obtainable for younger, working- and middle-class households, in the cities where those workers can easily find good-paying jobs.”

“We’re being very aggressive when it comes to buying homes right now — it’s all gas, no brakes,” says Myron Curry, senior investment specialist at RedfinNow, as quoted in iPropertyManagement.

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Implications and Solutions

The situation poses a potential quandary for mortgage lenders. Boomer buyers often need little more than a bridge loan to downsize, if that. So the trend impacts loan volume. It also has reputational implications.

“Millennials have upended consumer expectations, shifted the timing of various life stages, represent the most racially and ethnically diverse adult age group, and earn more than prior generations,” says a Freddie Mac report. One of its key findings: “Given the higher Millennial minority share, this generation is at risk of never reaching the same homeownership levels as older generations because of the historical divergency in homeownership rates between different races and ethnicities.”

What to Do:

Creative financing to help renters become homeowners will help. But ultimately more low-cost housing options including both modular and rehabs are key.

Moving might be one avenue to find affordable houses. “The analysis shows how younger buyers are seeing more luck in less expensive areas,” says Zillow. Older home buyers tend to move to sunny retirement homes, it says, while younger buyers were more successful in places like Buffalo, N.Y., and Salt Lake City.

The ability to work remotely, boosted by pandemic necessities, also may have an effect. “Previous Zillow research has shown that increased flexible work options have the potential to make homeownership an affordable possibility for millions of U.S. renters, who tend to be younger, and may especially benefit Black renters looking to buy their first home,” the real estate firm states.

The L & G survey offers these suggestions: “There are several creative approaches to solve this crisis, from availing ourselves of new technologies to build more affordably, for example, in the form of high-quality modular homes, to business models based on helping renters become owners, to rehabilitating the housing stock in smaller, more affordable cities and bringing their infrastructure into the 21st Century.”

“Why not meet the demand by creating more opportunity, not less opportunity, for ownership?” the L & G survey concludes. “Increasing the stock of affordable homes, using economic heft to actually create opportunities for home ownership, while getting a return on their investment — That way, all sides of the equation benefit.”

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