Thursday, June 22, 2017

By John Voket

In a recent release from apartmentlist.com, I was interested to learn that while millennials are starting to buy homes, there are not enough homes in their price range on the market - and eve if there were, many could not come up with a down payment.

In his latest Apartmentlist Rentonomics report, Andrew Woo writes that during the Great Recession, investors bought countless foreclosed properties, most of which were starter homes.

And rather than selling when prices recovered, investors turned them into profitable single-family rentals. And as a result, Woo says there are very few existing starter homes on the market.

Woo points to Megan McGrath of MKM Partners, who says the housing recovery was primarily at the middle end of the market which drove up home prices and land prices followed. With higher land prices, it is harder for home builders to make a good profit at lower home prices.

During the housing recovery, the price spread between new and existing homes increased because builders were focused on the move-up buyer. But Woo says now middle-end sales are starting to slow down, and builders need to target new buyers to sustain growth.

He says big builders are starting to introduce new product lines at lower price points, and these starter homes are selling well. But the only way for builders to lower prices and take a hit to their margins is if they see big growth in new orders, and he is not seeing that happening anytime soon.

Woo says the demand is clearly growing but is not as strong as demographics would suggest. Single-family construction still stands at 18% below its 25-year average, and he warns about a developing affordability gap.

Aparetmentlist.com recently surveyed 24,000 millennial renters and found that 80 percent want to purchase a home, but face a huge obstacle in affording one. Woo says it's because millennials vastly underestimate the savings needed for a down payment.

Woo fears based on current saving rates most millennials will need at least a decade to save enough - and that a lack of savings, combined with the shortage of affordable starter homes, will leave a large share of millennials renting for years to come.

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