By Shawn Tully
January 12, 2019

Over the past couple of years, rising pay and low mortgage rates finally converged to make make the dream of home ownership a reality for America’s millennials, many of whom had long been locked out of the housing market. But now, the door is on the verge of slamming on the under-35 crowd, leaving young families outside looking through the picture window—again.

That’s the scenario sketched by Mark Boud, chief economist for Metrostudy, a unit of real estate data and marketing company Hanley Wood. Metrostudy surveys housing trends in hundreds of towns and cities from the ground up, by visiting subdivisions to record how many homes are being built, going to contract, and sold—the latter evidenced by curtains on the windows and tricycles in the driveway.

During the housing-bubble frenzy from 2004 to 2006, as Boud recently recounted to Fortune, easy credit sent sales soaring, inflating prices and leading to a gigantic oversupply of new homes. In 2008 and 2009, the banks and other lenders, overwhelmed with defaults and foreclosures, throttled back so hard on credit that demand collapsed, and housing prices went into a tailspin.

The upshot: From 2009 to 2017, the housing market severely overcorrected, with prices steadily rising once again. “Housing went through a long period of undervalution,” says Boud. It wasn’t millennials, he points out, who benefited from the cheap prices and rescued the market. “The millennials had loads of college debt, and many had bad credit, often because their previous loans had been foreclosed on.” He also notes that many millennials were unable to secure stable, well-paying jobs in the wake of the Great Recession. And they were too The upshot: The youthful cohort had more difficulty getting mortgages than in the period before the financial crisis, limiting their ability to become homeowners.

Instead, it was the affluent and investors that profited from low prices and soaked up the excess inventory. “The rich were the buyers without the credit problems,” says Boud. “And institutional investors bought houses cheap and rented them out.” In fact, he says, many of these new owners’ tenants were the very millennials shunned by the banks. In terms of home ownership, millennials became the lost generation.

A lost generation comes home

By 2015, the wealthy and the investors had absorbed the excess. America began generating far more new jobs than new homes, as construction was severely constrained by a shortage of ready-to-go lots. Starting around 2017, the millennials got back in the game, in a big way. The job rolls expanded, and wages jumped. The mortgage market reopened for the more well-to-do 30-somethings. So even though credit overall remained tight, sales to millennials rose, from 22% of new homes sales around 2011 to 50% in 2018—a healthy figure, given that millennials account for just one-third of the U.S. population.

Now says Boud, the market is once again turning against the biggest, and still hungriest, class of buyers. “Prices have risen a lot, and they’re still rising because we’re still under-building compared to household formation,” he says. “At the same time, rates on home loans are rising, making it much harder for millennials to qualify.” The affordability problem will intensify because of the types of homes the builders are erecting. High land prices are forcing many builders to build large houses because land prices have increased so rapidly. “So the average home size has welling to over 2300 square feet, which is too big and expensive for first time buyers,” says Boud. The best way to make money on expensive land is to build big houses, so “the average home size is 3,000 square feet, which is way too big most first-time buyers,” he adds. “Ten years ago in Las Vegas, a house of that size cost maybe $150,000 [thanks to the housing plunge]. Now it costs $325,000, well out of the reach of young buyers.”

(Read “More Home Buyers Are Turning to Their Parents for Mortgage Assistance.”)

Hence, Boud sees sales shifting back to the affluent who’ve held high-paying jobs for decades, can qualify for more expensive mortgages, and want the big houses. Eventually, he says, the surge in prices will sow the seeds of a correction. But supply is so tight that the drop should be mild––unless America suffers a recession. “In that case, prices would be lower, but employment and incomes would also drop. So millennials could remain locked out.” Another problem: Millennials who secured a 3.5% fixed rate in 2016 or 2017 will stay in their existing home to keep the low monthly payment rather than trying to move up the housing ladder.

Homebuilders should also work with municipalities to increase the density of subdivisions, hence lowering land costs, and with the banks to offer loans that that would reduce monthly payments in the early years, allowing far more millennials to qualify for home loans. He also notes that developers need to take steps to lower home owner association dues that can add $300 to a family’s monthly payments. More smaller, high-density homes would be welcome, but for that to happen, municipalities would need to loosen zoning laws to allow far more lots to be subdivided far more quickly.

The millennial generation that housing lost, then briefly found, is about to be lost once more, unless we provide for them the type, size and price of homes they can afford.

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