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June 2016

Millennials opting for homes in "urban 'burbs"

NAR Generational Trends - Report CoverMillennials make up a growing share of homebuyers, and more of them are choosing the suburbs, according to a report by the National Association of REALTORS®.

Researchers for the Home Buyer and Seller Generational Trends Report noted soaring home prices and limited inventory were factors in the millennials' decision to forsake their urban dwelling for the 'burbs.

Lawrence Yun, NAR chief economist, says while millennials may choose to live in an urban area as renters, the survey reveals that most aren't staying once they're ready to buy.  Demographer Dowell Myers, an urban planning professor at USC, agreed, saying "Millennials' preference for cities will fade as they start families and become more established in their careers."

The NAR trends report revealed buyers 35 years and younger continue to be the largest generational group of home buyers, marking the third straight year of their dominance. Last year they composed 35 percent of all buyers, up from the 2014 figure of 32 percent. That's more than the combined amount of younger and older boomers (31 percent). Generation X made up 26 percent of buyers, with the Silent Generation (those born between the mid-1920s and early 1940s), accounting for 9 percent.

Among other key findings from the NAR research:

  • First-time buyers made up 32 percent of all home buyers, down from 33 percent in 2014.
  • The share of millennials buying in an urban or central city area dropped from 21 percent in 2014 to 17 percent in the latest survey.
  • Fewer millennials (10 percent) purchased a multifamily home compared to the prior year (15 percent).
  • Sixty-seven percent of buyers 35 years and younger were first-time buyers, followed by buyers 36 to 50 years at 26 percent.
  • The most common type of home purchased continues to be the detached single-family home, which made up 83 percent of all homes purchased.

Yun said limited inventory in millennials' price range, minimal entry-level condo construction and affordability pressures make buying in the city "extremely difficult for most young households." Even if millennials prefer an urban setting for their first home, he said that isn't always realistic. "The need for more space at an affordable price is for the most part pushing their search further out," he explained.

That conclusion is underscored by an affordability index compiled by Bloomberg. Using data from the U.S. Census Bureau, Zillow Group Inc. and Bankrate.com, Bloomberg quantified how much more millennials would need to earn each year to afford a home in the largest U.S. cities.  Even though 37 of the 50 metro areas in its Millennial Housing Affordability Index are actually affordable for the typical 18-34 year-old, many of the cities that most appeal to this cohort have huge gaps between home prices and earnings, making homeownership out of reach.

Seattle, with a gap of $5,778, is one of these cities with an affordability gap, ranking No. 7 on the list. The biggest differentials are in San Jose (-$80,162), San Francisco (-$60,975), Los Angeles (-45,761) and San Diego (-$36,084).  Also earning a dubious place on the list of cities with affordability gaps were Sacramento, New York, Riverside, Calif., Washington, D.C., Boston, Miami-Fort Lauderdale, Denver, and Portland.

Suburban developers around the country are hoping to appeal to Millennials and their quest for work-life balance by creating more city-like developments, which some call "urban 'burbs." Such communities incorporate many amenities found with in-city living, including walkable downtowns with restaurants, shops, and grocery stores, easy access to transit, and mixed housing types with a range of prices. 

Debt continues to be a drag on many buyers' ability to purchase a home. NAR found debt delayed saving for a down payment for a median of four years for all buyers, but it posed a bigger problem for older boomers who, on average, postponed their purchase for six years; among millennials, debt caused a three-year delay.  Both student debt and credit card debt have an impact.

"One of the many reasons housing supply has been subdued in recent years may be because a segment of homeowners have decided to delay trading up or moving down in order to pay down their debt, including from student loans," suggested NAR's Yun.

The Generational Trends Report, released in March, was on a 128-question survey mailed to nearly 95,000 recent home buyers.  NAR members may download the full report on the Realtor website.