War in Ukraine could push Millennials and Gen Z out of the home buying market

By Robert Davis

As the war in Ukraine rages on, economists are growing increasingly concerned that it could push Millennials and Gen Z homebuyers out of the market.

Economists say the war could exacerbate the high inflation and soaring gas prices that the U.S. economy is already facing, both of which greatly influence the housing market. While home equity appreciations have helped many homeowners thwart these economic impacts, the breakneck speed at which homes prices are rising is making it difficult for many potential homebuyers to find an affordable match. 

Photo: Gus Rubella/Unsplash

But even if these issues subside, the damage may already be done. The Federal Reserve Bank is set to increase interest rates several times this year, which will make it more expensive for homebuyers to take out loans like mortgages. Meanwhile, an increasingly tight job market isn’t helping matters either as employed workers struggle to find wages that allow them to afford a home. 

"Housing is currently acting as support to an otherwise slowing economy, although it is adding significantly to inflation," Dave Duncan, chief economist for Fannie Mae, said in a statement. 

Housing is generally viewed as a good asset to buy during times of high inflation. One reason is that home prices generally rise in inflationary times, especially in markets with very low supply. Another reason is that the fixed-rate mortgages that typically come along with homebuying give homebuyers some protection from rising interest rates. 

And it’s the rising cost of capital that is keeping many potential Millennial and Gen Z homebuyers out of the market. According to the latest commentary from Fannie Mae’s Economic and Strategic Research Group (ESG), the group expects the central bank to raise interest rates a total of five times this year and eight times next year to rein in inflation. 

Fannie Mae, a quasi-governmental agency that Congress created in 1938 to support the secondary mortgage market, expects its 30-year fixed mortgage rate to increase to 3.8% this year and to 3.9% in 2023. This figure means that lenders must guarantee at least a 3.8% return on all loans they plan to sell to Fannie Mae this year, and a 3.9% return next year, according to the agency’s website

For banks, these guaranteed return levels require them to place a higher onus on an applicant’s previous loan repayment history and credit score. It also means they must increase their interest rates to make sure they can cover the cost of maintaining the mortgage. According to Bankrate.com, the average interest rate on a 30-year fixed mortgage taken out by a private lender is 4.46 %t as of March 16. 

Given the challenging monetary environment many homebuyers are facing, ESG anticipates the nationwide homebuying rate to decline by 4.1% in 2022. This will be compounded by the increasing demand for housing, which Duncan said could push home prices even higher. 

“Even as interest rates are rising and reducing affordability, demographics are still strong supports for demand, and the paucity of existing home supply is supporting new construction and sales,” Duncan said. 

Outside of the capital markets, a recent study by real estate data company Point 2 homes found that the average wages for Millennial and Gen Z homebuyers are too low for them to afford homes in many of the country’s 100 largest counties. For example, Millennials can’t afford median-priced homes in 66 of the 100 largest counties, Denver County included. Gen Z homebuyers can’t afford homes in any of the counties listed. 

The song remains the same for many homebuyers in Colorado as the state’s labor market continues to tighten. Colorado has regained more than 98% of the jobs it lost during the pandemic, according to data from the Department of Labor and Employment. 

However, wages in some of Colorado’s most populous employment sectors have not had the same recovery. For example, Colorado’s leisure and hospitality sector has added back more than 64,000 jobs over the last 12 months but the median annual salary for the industry is $26,000, representing a four% growth rate year-over-year. 

For comparison, the price of housing in Colorado has risen by 4.7% over the past year, according to the latest consumer price data from the Bureau of Labor Statistics. While BLS housing data primarily measures rent increases, the Case-Schiller Home Price Index, which measures real estate prices, found that homes in Colorado appreciated at an 18.8% clip last year or more than 1.5% per month. 

Duncan said the rising interest rates could provide a boost for many prospective homebuyers as it could lead to decelerating bidding wars and price gains. However, it will be difficult for homebuyers to capitalize on that opportunity if their jobs aren’t paying high enough wages. 

“We believe this comparative resilience will be temporary, though, as eventually this pool will be exhausted, Duncan said. “This is especially true given we expect that many recent purchases represent buyers moving forward with their plans, meaning future demand will soften at some point.”

 

 

 

 

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