Millennials are the generation most likely to be affected by the expected global economic slowdown in the aftermath of a post-COVID world. They are unfortunate because many have yet to recover from the Great Recession of 2009.
This group of young people are now between their mid-20s and late-30s and seem to be at a disadvantage when it comes to wealth accumulation. When compared to previous generations, they have fewer savings than others had at their age, and still have relatively low rates of homeownership.
In a 2018 Federal Reserve Board of Governors paper, it was shown that millennials have low levels of real incomes. This is due to the timing of the two economic downturns, which is unfortunate because usually, these only occur once in a generation. Millennials are at a disadvantage because they are living through their second downturn, both just a decade apart.
Meanwhile, a Vox.com report on the COVID-19 economy shows that even though American households have nearly $15 trillion in debt, the debt differs between older and younger Americans. Older Americans owe money because they have borrowed to purchase assets, including homes, but millennials have mostly student loan burdens.
In their 2019 essay, “The Emerging Millennial Wealth Gap”, University of Wisconsin researchers Fenaba R. Addo and Yiling Zhang are quoted: “It is not surprising that the median wealth of all Millennials with any debt at age 30 is lower than those with no debt who attended college; however, their median wealth levels are also lower than young adults who never attended college.”
Millennials believed that their college debt would be alleviated by higher wages as they grew older. However, due to the growing costs of tertiary education and the economic crisis, it is highly unlikely that they will benefit any time soon.
Loss of savings
Many millennials have been saving towards buying a home but have currently been hit with an unemployment rate of about 13.4%. This means that many with savings have had to dip into them to cover their basic needs, including rent and groceries. This group will likely take longer to recover these savings. In some of the most popular housing markets for millennials the problem will be exacerbated by higher home prices, ,making it even more difficult for them to afford a home.
Mortgage lenders have imposed stricter requirements
Even though mortgage rates continue to decline and are at historical lows, stricter lending requirements are making homes less affordable for this group of buyers.
These lending requirements include a 20% down payment and a higher credit score rate of above 700. According to George Ratiu, senior economist at Realtor.com, the average in credit score in people in their 30s is 673.
Homes are in demand but not as affordable
Many millennials are starting a family, and as seen from other crises, the birth rate is expected to be higher toward the end of 2020. This is leading to more millennials looking for detached homes in the suburbs.
The number of millennials working from home has also increased, and this trend is likely to continue in a post-COVID world. Young families are looking for homes that can also accommodate a home office.
Another interesting development in the housing market is that even though home buyers have increased, sellers have decreased. The result is a constrained supply of homes for sale, and a limited supply is going to lead to a price increase.
America has a shortage of starter homes, and first-time homebuyers are paying 39% more than those who were purchasing their first home 40 years ago. According to a report by Realtor.com, 2019 saw the construction of more homes in the higher price bracket. Moreover, the starter homes that were built were grabbed by real-estate investors.
What does all this mean for millennial homebuyers?
The 20% down payment requirement imposed by banks and the increased price of homes means that in a post-COVID world, millennials will need on average four and a half years of savings to make it possible before they can afford a home.
This is according to a recent analysis by Realtor.com who considered a person who was unemployed with no income for 6 months. This adds up to 9 months of savings to recover the expenses for every one month of no income.
The Economist reported that millennials only owe 4% of American real estate by value. This figure is very low when compared to the ownership levels of baby boomers at their age, and is a whopping 28% less.
All said and done, these analyses cannot take into consideration the time it will take post-COVID incomes to normalize to pre-pandemic levels. Recovery time could be far worse, especially in the urban areas of the U.S.
