On August 6 President Barack Obama delivered a speech that outlined his ideas about homeownership and housing finance reform—areas that might not be of concern to the average Millennial. Since they face more immediate issues such as finding employment and paying off student loans, Millennials may have tuned out the president’s speech. What Millennials may not know, however, is that housing finance reform will have serious long-term impacts on them, particularly with respect to wealth accumulation, housing rentals, and possible discrimination.
Millennials and homeownership
From the advent of the financial crisis to 2011, homeownership among young adults fell by 12 percent to its lowest share in at least four decades. More than one in three Millennials—21.6 million people—are living at home with their parents, the highest rate in more than 40 years. Millennials are doing so for a number of reasons, including declining employment, massive student-loan debt, low housing inventory, competition with investors, and delayed marriage.
As a result, the Millennial generation’s homeownership rates are lower than those of their parents. For some, delaying homeownership is a voluntary choice: They move in with their parents to save money or rent to maintain job mobility. For others, it is not voluntary, owing to poor employment prospects or a lack of financial resources for a down payment. Either way, this trend has serious implications for the ways in which Millennials accumulate wealth and build financial security.
Homeownership is not just an emotionally driven benchmark in achieving the American Dream. More importantly, it is a financial investment that has a significant impact on American families’ standard of living and overall well-being. Paying down mortgage principal through monthly payments is functionally a long-term savings strategy, which is why successful homeownership can lead to wealth accumulation. Homeowners are more likely to vote in local elections and be engaged in their communities, and equity from homeownership enables families to make other important investments, such as investing in their children’s college educations. In fact, U.S. economic policy is geared toward making homeownership the crux of financial wealth building. Federal housing subsidies are heavily directed toward homeowners, making homeownership one of the easiest, most streamlined methods of accumulating long-term wealth.
The role of homeownership in asset building is particularly important to Millennials—especially since they may very well be the first generation to have less overall wealth than the previous generation.
Congress is considering new legislation to transform the mortgage financing system, de-emphasizing the role of Fannie Mae and Freddie Mac in order to prevent another financial collapse like the one in 2007. There are multiple proposals on the table that would have direct effects on how easy or difficult it is for Millennials to buy homes.
Specifically, the structure of the new mortgage finance system will determine the availability and cost of credit, the size of down payments, and how much other debt a homebuyer can carry—all important issues to Millennials, who are saddled with unprecedented student debt. It will also determine whether Millennials have access to the same 30-year, fixed-rate mortgages that were available to their parents. In short, what Congress decides will have critical implications for when Millennials can buy homes, what communities they can afford to live in, and how much wealth they accumulate over their lifetimes.
Millennials and rental housing
Millennials are also transforming the housing landscape as the renter generation. With more than 60 percent of Millennials reporting concerns over their financial situations, thousands are gravitating toward temporary multifamily residences in metropolitan areas. Additionally, a recent survey found that 77 percent of Millennials prefer an “essential” home to a “luxury” one, indicating that this trend may represent a generational shift in permanent housing preferences.
Millennials are also more mobile than their parents. A majority of Millennials would like to own homes at some point, but a recent survey found that 63 percent of Millennials were planning a move in the next five years and that nearly 40 percent expect to live in some type of apartment building. Today 35 percent of all Americans are renters, the highest rate since 1995—and that percentage is only expected to increase in the coming years.
But the availability of affordable rental housing is also tied to what happens in the housing finance system. Comprehensive housing finance reform should ensure the availability of affordable rental options. Without a government backstop on mortgages, more than one-third of American families who rent—a group whose median income of $31,000 barely qualifies them as middle class—will see the size of their rental payments increase and the supply of affordable rental stock decrease. These issues also require new solutions. More than half of all renters, for example, are served by housing units that are financed through single-family channels, which is why housing finance reform should also include nuanced approaches to multifamily housing.
Finally, Millennials are the country’s most diverse generation so far—which makes them especially susceptible to discriminatory housing policies. In fact, for the first time in American history, minority groups comprise roughly half of Americans under the age of 5, indicating that discriminatory housing issues will only compound for future generations.
These demographic changes will affect housing reform in a few ways. First, some policymakers would like to require high down payments that would require decades’ worth of savings for otherwise creditworthy borrowers, but this is a policy that would disproportionately affect black and Latino households—the same communities that have been targeted by subprime lending schemes.
There are other, more effective means of ensuring the quality of mortgages—ones that do not exclude significant minority populations. A recent study from the U.S. Department of Housing and Urban Development, or HUD, which spanned 28 cities and used 8,000 tests, found that minorities have a harder time accessing housing inventory and receiving equal services, underscoring the importance of preserving federal institutions and programs that ensure accessible and affordable mortgages.
Finally, after the financial crisis, conventional mortgage lending plummeted for all Americans—but particularly for minority groups. Research shows that from 2005 to 2009, lending to whites dropped by 67 percent, while lending to African Americans and Hispanics dropped by 85 percent. The pervasiveness of such discrimination demonstrates the importance of community banks, which ensure adequate financial services to predominantly minority clients.
President Obama’s and Congress’s proposals to reform the housing finance system matter a great deal to Millennials, whether they currently have plans to own homes or are considering becoming renters. As potential future homeowners who are transforming the housing landscape, Millennials have a considerable stake in the politics of housing reform.
Jessica Kaushal is an intern with the Housing Finance and Policy department at the Center for American Progress—and is herself a Millennial who hopes to one day be a homeowner.
To learn more about how we can make the mortgage market work for Americans, check out the Center for American Progress’s June 2013 report.
Read CAP’s statement on President Obama’s speech here.
An explanation of President Obama’s key housing points can be found here.