First-time homebuyers are the heart of the housing market. Their purchase of starter homes puts the market in motion. First-time buyers allow middle-aged homeowners to move to bigger and better homes as their families expand.
In turn, the purchase of larger homes by expanding families allows older homeowners to downsize. Without first-time buyers, this circulation comes to a halt. Homeowners are stuck, mobility declines and property values fall.
That’s where we are today. The supply of first-time homebuyers has dwindled, and the housing market has stagnated. Although home buying has increased from the lows of the Great Recession and prices have risen, investors rather than first-time buyers are responsible for much of the increase. According to the National Association of Realtors, first-time buyers account for only 28 percent of homebuyers today. Prior to the Great Recession, they were 40 percent.
To function properly, the housing market needs a sufficient supply of first-time homebuyers. For decades, that buyer has been a 30- to 34-year-old, the age at which the homeownership rate historically first surpassed 50 percent. The financial woes of the millennial generation have shut millions out of the housing market, lowering the homeownership rate of young adults and driving the age of first-time home buying into the 35-to-39 group.
Between its peak year of 2004 and 2013, the nation’s homeownership rate fell from 69 to 65 percent. Metro Atlanta experienced a 6-percentage-point drop since the peak.
The homeownership rate of households headed by 30- to 34-year-olds fell by more than 9 percentage points, from a 57 percent majority in 2004 to a 48 percent minority in 2013. Among 35- to 39-year-olds, the rate fell by an even larger 10 percentage points during those years, from 66 to 56 percent.
The homeownership rate of young adults has fallen, in part, because of debt. Most college graduates have education debt. Many young adults without a college degree also have student loans. The Federal Reserve Bank of New York reports student loans are now the largest form of consumer debt after mortgages.
A substantial 40 percent of households under 35 have education debt, according to the Federal Reserve Board’s Survey of Consumer Finances. Households under 35 are more likely to have student loans than mortgage debt, vehicle debt or credit-card debt.
Debt is not the only problem. The incomes of young adults are declining. Between 2000 and 2007, the median income of households headed by 25- to 34-year-olds fell 5 percent. Between 2007 and 2012, the decline was 9 percent. The median household income of 25- to 34-year-olds was just $51,381 in 2012, nearly $8,000 less than the $59,219 of 2000, after inflation adjustments.
A growing share of that shrinking income is diverted to student loan payments, leaving little for home buying and shutting down circulation in the housing market.
Cheryl Russell is a demographer and editorial director of New Strategist Press.
