The anxiety this generation feels about never owning their own home affects their entire perception of their finances and the economy, says Mark Zandi, chief economist at Moody’s.
“If they feel like they’re excluded from owning a home, it affects their perception of everything that happens in their financial life,” Zandi says.
Millennials have long been haunted by a brutal housing market. They faced not one, but two catastrophic economic events: the Great Financial Crisis in 2008 and the pandemic in 2020. Both left them financially reeling and struggling to afford a home. The Great Recession decimated the housing market as the economy nearly collapsed under the weight of weak mortgage-backed securities. While the pandemic brought with it a boom in remote work that forced millions of city dwellers to flee to the suburbs, causing house prices to soar.
Failure to address the affordability crisis plaguing U.S. housing will mean that young people, who “already feel disenfranchised,” according to Zandi, will lose faith in the economy and vent their frustrations about President Joe Biden on Election Day. (Fortune he was speaking to Zandi in the context of his team’s analysis predicting the 2024 election outcome based on economic results.)
Bad news for Biden
“Homeownership is just unaffordable,” Zandi said Fortune. “If it appears that affordability is getting worse and their prospects of becoming homebuyers are diminishing, that will undermine Biden’s reelection bid.”
Then, last October, mortgage rates rose to their highest levels in 20 years, exceeding 8%. For millennials, soaring rates, combined with the recent cost of living crisis, seemed to make owning a home even more unlikely. Now, however, mortgage rates are falling to around 6.8%, giving potential buyers hope that the housing market may become more manageable.
When interest rates are at 6%, “people feel like they have a chance of becoming a homeowner sooner or later,” Zandi says. “Mortgage rates are really, really critical” in this regard.
Although the current rate is still a far cry from the 2.6% rates in January 2021, which were among the lowest on record. They are unlikely to return to those levels, but are expected to continue to decline. Some estimates see them drop as low as 5.5%. Other economic signs also point to improvements in the economy, with inflation falling and a continuing strong job market.
When coupled with declining mortgage rates in recent months, this should make it easier for millennials to afford a home, something they care deeply about. A December note from a Bank of America Research analyst found that homeownership is more important to millennials than it was to their parents when they were the same age. One of the reasons this specific generation places such a value on homeownership is because it is a way to insulate themselves from other forms of economic turbulence.
“The pursuit of homeownership is on the rise because of its importance as a respite from an unstable economic environment,” says John Walkup, co-founder of real estate analytics firm UrbanDigs.
The plight of older millennials
That’s not to say it’s completely impossible for millennials and Gen Z to buy homes. In fact, analysis from Bank of America Research finds that younger millennials, ages 28 to 35, were closing the gap in homeownership compared to Gen X and boomers. There have been some improvements since the pandemic, with homeownership rates among young people higher than in 2019, according to progressive economist Dean Baker. However, they remain lower than they were before 2008 and its epic real estate crash. Both data points, however, illustrate the fact that millennials have never fully recovered from some of the economic shocks they have experienced.
Older millennials especially are bearing the brunt of these multiple economic setbacks and the current affordability crisis. They found an exceptionally distressed housing market and at the same time were saddled with exorbitant student loan debt and a recession that hit them just as they entered adulthood. One real estate executive estimates that homes are so unaffordable that incomes must rise 55% to keep up with prices.
Much of the American Dream is tied to purchasing a home not only because of the sentimental factors associated with owning a home, but also because it is a key source of wealth creation. “Historically, real estate has been a surefire way to unleash wealth…especially for the middle class,” says Monisha Rana, a real estate agent at Coldwell Banker Warburg in New York.
According to the National Association of Realtors, the typical homeowner’s net worth is 40 times higher than that of someone who rents. Selling a home, especially if the value has increased, which is likely this year considering Morgan Stanley has forecast a 5% increase in home prices, can create a windfall for families who have much of their equity tied up in their home.
Not owning a home can have long-term effects on an individual’s financial situation throughout their life.
Homeownership is about “deeper feelings about the economy, particularly for younger people,” Zandi says. “If they can’t afford to buy a house, it really undermines their overall view of everything else when it comes to economics: jobs, wages, net worth.”