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Millennials Are Still Struggling To Get Into Their First Homes

While more young adult "millennials" finally are ready to move out on their own, the impact of this trend on the U.S. housing market probably won't be felt for a few more years, economists say.

Millennials, also known as Echo Boomers and Generation Y, are defined as those born between the early 1980s and early 2000s. As more of these folks graduate into the working world they represent a huge potential market for homebuilders and real estate agents.

The problem is, many still don't have the financial means to afford a home, and that's not likely to change anytime soon.

The National Association of Realtors says that in 2012, the most recent annual data available, the percentage of U.S. adults under age 35 living at home was at its highest level since 1981.

More than 30% of those ages 18 to 34 lived with their parents, above the historical average of 28%. Nearly 14% of those 25 to 34 still lived at home vs. the historical average of 11.7%. This approximately 2-percentage-point difference translates into around 800,000 people.

The NAR also says the homeownership rate of those under 35 declined to about 37% in 2012. That's down from a peak of more than 43% in 2004 and 2005 and represents the lowest level since such data began being tracked in the early 1980s.

The reasons so many millennials still live with their parents are many and varied.

"They have been affected on a number of fronts: tight credit standards, recession, the weak labor market, more student loans than earlier generations," said Jessica Lautz, the NAR's director of member and consumer survey research. "So there is pent-up demand for homeownership.

Different From Boomers?

There's no denying that millennials have a lot of buying power. According to the NAR, more than 71 million young adults ages 18 to 34 lived in the U.S. in 2012. In contrast, there were roughly 69 million baby boomers in this age group in the mid-1980s.

Unlike those boomers, however, modern-day young adults have been hampered by a long and deep recession, a historically ugly financial crisis and a lousy job market.

The good news is that now more millennials are finally starting to find work, says Jed Kolko, chief economist at Trulia (TRLA), a real estate website.

"The number we look at is the employment rate — the percentage of 25- to 34-year-olds who are employed. That percentage has gone up in the past year," he said. "It's still lower than before the recession, but we are seeing progress. This is important for housing because young people are much more likely to live on their own if they have a job.

Normally, these people are good candidates for the kinds of first-time homes that are sold by leading builders such as Lennar (LEN), Pulte Group (PHM) and D.R. Horton (DHI). However, many millennials — even those who now have steady jobs — are seen likely to delay home purchases.

"I expect they will rent for several years before they buy," Kolko said. "It takes years to save enough for a down payment and commit to a mortgage. Also, young people are coming out with more student debt than in the past, which makes it harder to save for a down payment and also factors into how creditworthy a borrower you are.

Millennials are also more apt to locate in urban areas than previous generations, Lautz says. Because these locales tend to be more expensive than suburban or rural areas, potential homeowners must save even more money to afford a down payment.

Although many millennials are still struggling to get their footing professionally and financially, there are some positive developments for home ownership.

Who The Homebuyers Are

Lautz points out that millennials now represent the largest share of recent U.S. homebuyers, at 31%. They rank just ahead of Generation X (30%), which includes people born from 1965 to 1979.

The median age of millennial homebuyers is 29, according to an NAR report on generational trends released this month. Their median income is $73,600 a year, and they typically bought an 1,800-square-foot home costing $180,000.

The percentage of young adults buying homes still lags well behind earlier generations.

"I would say (millennials) want to buy, and as they pay down their debt more will be homebuyers," Lautz said.

As the economy and credit environment have improved, however, other groups have been purchasing homes. These range from move-up buyers in their 40s and 50s to empty-nest boomers who have decided to downsize to smaller homes or full-nest boomers who have bought larger homes to accommodate extended family.

According to NAR data, about 22% of younger boomers — those born between 1955 and 1964 — live in what Lautz calls a "multigenerational" home that can house both aging parents and jobless kids.

"It is a new dynamic in the American household, and there are different factors that play into that," Lautz said. "Some want to spend more time with family, but there are also economic reasons.

Another trend that has shifted the dynamic is that investors have done a lot of homebuying over the past year or two, Kolko says.

"First-time homebuyers are a small share of the market now," he said. "While the recession made it more difficult for people of all ages to be homeowners, the housing crisis has opened up opportunities for investors."