The decline in homeownership among young adults can be attributed to a variety of financial headwinds like student loans and societal shifts like marriage rates, but rising housing costs are the core issue, according to research by Freddie Mac economists.
The homeownership rate for adults age 25 to 34 was 37.5% in 2016, about three percentage points lower than the historical average for this demographic and eight percentage points lower than the all-time high in 2004.
Freddie economists created a statistical model using Census Bureau data to estimate how a variety of economic and demographic factors affect homeownership. They found higher home and rent prices account for nearly 50% of the drop in homeownership rate for young adults, with tight inventory and high demand also putting upward pressure on home prices and spilling over many potential homeowners into the rental market.
"Historically low mortgage rates and increasingly favorable employment conditions should have generated a far greater number of home purchases by young adults, especially in the last five years. Unfortunately, home price and rent growth above incomes — driven primarily by a severe shortage of housing supply — have been too high of a hurdle for many would-be buyers to clear," Sam Khater, Freddie Mac's chief economist, said in a press release.
While economic conditions are improving, growth in income and wages are still being outpaced by increases in the cost for housing. Growth in mortgage rates is also creating greater affordability setbacks for millennial homebuyers.
In addition to financial challenges, 22% of homeownership rate declines for young people can be attributed to lower marriage and fertility rates, with a combination of student debt, a preference toward renting, borrowing constraints and other factors accounting for another 13%.
"At a time when rising home values continue to build housing wealth for most homeowners, these weaker affordability conditions have led to a missed opportunity for the interested young buyers who are unfortunately priced out of the market," Khater added.
Roughly 700,000 young adults did not buy a home between 2000 and 2016 due to growth in inflation-adjusted home prices and rent, according to Freddie Mac.