Millennials are finally buying homes, Baby Boomers are downsizing, and Gen-Xers are upsizing. Now add to the mix a national housing shortage and population shifts. What does all this mean for housing markets in Washington DC Metro and the country?
The Roles of Millenials, GenXers, and Baby Boomers
The millennials (1981-2000) have been late to the home-buying party, but they now seem to be fully engaged. Many have waited to buy homes, either by design or necessity, until they accumulated healthy down payments. (Gone are the days of 0-5% down payments for houses, thanks to the housing market crash of the late 2000s). Part of the trend is the unwillingness of the millennials to take on new major debt especially if saddled with large student debt, partly out of economic and employment fears, and partly out of a desire to avoid being tied down too early in life. With wages stagnant and rents relatively low in many cities, many millennials have chosen to remain with their parents or to rent with friends. However, that trend has finally shifted, and millennials are expected to make up 35% of all home buyers this year. And surveys have shown that millennials are not all looking for starter homes as some previous generations of first-time homebuyers. They are looking for homes they will stay in a while with amenities and in trendy neighborhoods.
Gen-X(1965-1980) is in its earnings peak right now, and many in this group can now afford larger homes in better neighborhoods. According to Realtor.com, 27% of Gen Xers still have student loan debt, and 21% wanted to sell/buy earlier but their home was financially under water. In fact, 14% of this group had a distressed sale in the past so they understand first-hand the volatility of real estate markets. When the Gen-Xers "move on up" this has the net effect of creating more affordable housing (the houses they sell) and reducing available luxury housing (the houses they buy).
As the baby boomers (1946-1965) age, they are increasingly realizing that the maintenance (and often the tax bills) of their large family homes are costing them precious time and money. As these big, old, mostly-empty houses are losing their charm, many boomers are moving back into cities to enjoy a more urban, walkable lifestyle. This migration creates an inventory of larger family homes, and much of it is in need of a serious freshening, if not a full rehab. The result is a golden age for real estate investors, who help recycle older houses to the younger generations.
The National Housing Shortage
An ideal or "balanced" housing market is one with 6-7 months of housing supply. Currently, across the country, the housing stock has an average of about 4 months supply, with some cities having much less. Washington DC, for example, has about 1.8 months of supply which is pretty low! Interestingly, DC didn't even make the list of the 10 cities with the lowest available housing. Those include Seattle, Portland, Detroit and Sacramento, each with a .4 month to a 1 month supply. Closer to home, Alexandria, VA has been featured several times by Washington Business Journal editor Michael Neibauer, in articles about the fact that the town's increase in single-family detached homes has been exactly 1 home (being built now) since 2010. Read his latest article here.
According to a recent Forbes article, this housing shortage is due to continue for at least 4 more years, based on the number of new houses being built and new families being formed. The housing shortage also contributes to rising home prices. In fact, according to Forbes, "from 2011 to 2016, the median home price will have risen by 42% compared to the median household income gain of only 17%". The shortage and related price increases makes it tougher for families to find and afford a home in many cities across the US and has caused more families to move to outer suburbs.
Another interesting trend involves population shifts. The biggest percentage population gain from 2010 to 2016 occurred in Washington DC (+13.20 percent). Of the top ten states with the largest populations increases, nine are in the west, with Florida representing the only southern state. Three states actually lost population during the period: West Virginia, Illinois and Vermont. Naturally, home-buying (and home-renovation) activity will follow the movements of the people, which is why the Washington DC region remains such a hot market for developers and rehabbers. See our blog about 5 hot zip codes for fixing and flipping in DC right now!
Walnut Street Finance is a provider of hard-money loans, bridge financing and other non-bank financial solutions for real estate investors and developers in the Washington DC region.