The big story in residential real estate over the last few years has been the COVID crisis and its effect on demand for residential housing. This surge in demand has been primarily (but not solely) focused on suburban locations as large numbers of families migrated away from large urban centers. As the demand surged, prices followed suit. As recently reported in the Wall Street Journal, ““Rarely has the for-sale home market been more heated than in the past year. The median price of an existing home sold in October was nearly $354,000, close to a record and up about 13% from a year ago, according to the National Association of Realtors. Prices have climbed from a year earlier for a record 116 straight months, with double-digit percentage gains touching every corner of the U.S. this year.”[i]
Without question, this aspect of the residential housing market has captured most of the attention from the press. However, the effects of the COVID crisis have actually masked a major additional force driving the surge in residential housing demand. That force is the mass entrance of millennials into the residential home-buying market. As stated in the article, “The [millennial] generation’s growing appetite for homeownership is a major reason why many economists forecast home-buying demand is likely to remain strong for years to come.”1
However, it wasn’t supposed to be this way. For years, experts predicted that the millennial generation differed from those that came before it in that – as a group – they had less interest in home ownership. However, that is shaping up to not be the case. From the article: “For years, conventional wisdom held that millennials, born from 1981 to 1996, would become the generation that largely spurned homeownership. Some real-estate brokers also theorized that millennials preferred to rent and spend money on travel and experiences rather than buy houses. Instead, since 2019, when they surpassed the baby boomers to become the largest living adult generation in the U.S., they have reached a housing milestone, accounting for more than half of all home-purchase loan applications last year.”1 Apparently, the desire to own one’s home and raise a family is pretty consistent from generation to generation.
At the outset, what looked like a lack of desire to own a home, was actually the end result of complex macro financial factors. Millennials – as a group – entered the home-buying age at a time in which the US was reeling from the housing crisis of 2008/09. The generation was entering the workforce during an economic downturn, with higher levels of student debt, and less cash for down payments. As detailed in the article, “The financial stakes could scarcely be higher for millennials, who have faced a wide wealth gap with previous generations. Burdened by student debt and with career paths sidelined by the 2008 financial crisis and housing-market collapse, many millennials lacked the savings for a down payment in their 20s. Some distrusted homeownership as an investment. Credit standards tightened after the housing crash, making it more difficult for many young borrowers to qualify for loans.”1 That is as challenging an environment for first time home buyers than we have experienced in generations.
There are significant challenges that millennials still face when entering the residential real estate market. There is still an historical low level of homes for sale. The after-effects of COVID will continue to linger, most likely extending remote work arrangements, and continuing to push families from urban locations to suburban locales. None of these will go away anytime soon. As summarized in the article, “most housing analysts don’t expect a wave of sustained home price cuts for quite a while. That mismatch is providing a sort of floor for the market, an army of buyers ready to swoop in and act if prices begin to sag, brokers and real-estate executives say. They say the pandemic and the emergence of remote work accelerated millennial home-buying trends already under way.”1
Any one of these factors alone would suggest a housing market that will continue to experience strong buying demand. However, the movement of the millennial generation into the home buying market, in reality, is in its early innings. Demand from this generation could remain strong for the coming decade. That is potentially good news for investors in residential real estate.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.