Matthew Ferrara, Philosopher
 

Are you ready for a drop in first time buyers?

There’s no doubt that homeownership remains the American Dream. But what will REALTORS do if decides to defer that dream for, say, a decade?

A recent conversation with my friend Steve Harney (one of the smartest people I know in the business) got me thinking: Is the real estate industry prepared for even the smallest drop in the number of first-time buyers? Since this question comes from a previous discussion, let me rewind.

It all started when I posted a quote from a Urban Land Institute report that noted that Gen Y is likely to rent or defer home ownership decisions for longer than their parents, the late Baby Boomers, did. The starting quote was:

They will be renters by necessity and by choice rather than homeowners for years ahead,” he says. “They have lost the confidence of prior generations that homeownership is a way to develop wealth.

This got the attention of some people on our Facebook page, including Steve, who rightly noted that the report concluded that actual demand for housing would increase. Which is technically correct: Generation Y will still be buying homes.

Eventually.

I noted that the report pointed to a number of factors that could “delay” the initial purchasing decisions of Generation Y for years to come. Essentially, Gen Y (aged 20-35) is coming out of college with the highest debt levels of any generation since the 1930s, into the longest and deepest recession since the same time. As the report notes:

Real median incomes for groups under 55 have not increased since 2000. In fact, for the first time in 40 years, there is a chance that the real median household income for these age groups will be lower at the end of the decade than at the start…

This generation will be income constrained. The US Census Bureau reports that during the last decade, incomes of those 25 to 34 years old have fallen 12 percent for men and 3 percent for women. This is unlikely to change in the coming decade and will result in most of generation Y living more modest lives than their parents with little money for housing.

But the report goes further. As our readers know, one of our company’s focus areas is helping companies understand who their customers are, and, as a result, how they are likely to act in the marketplace. Certainly, the economic profile of a customer is vital, but we’ve always gone beyond that to help agents and brokers get “inside the heads” of the of buyers and sellers. This means understanding how they were raised, how they learn, play, use technology, and most importantly, what they value. Which is why the ULI report resonates with me so much. It points to other reasons – sociological, if you like – why Gen Y might be willing to defer their first home purchases a lot longer.

Generation Y’s attitudes toward homeownership have been changed during the housing crisis, and the recession. The number of people trapped by underwater homes that cannot be sold, and the millions of foreclosures are tempering their interest in buying their own homes, and they will be renters by necessity and by choice rather than homeowners for years ahead.

The report, like many others we’ve seen, points to important changes in the “attitudes” of the next generation of consumers from the previous generation. It identifies trends that many of us might find familiar in our own lives: Young people moving back home, living with mom and dad longer, even before the financial crisis occurred. Or the attitudes towards marriage (fewer considering it as important to their lives, or deferring it until their 30s) compared to their parents who were married with children, in large part, before their mid-twenties. Plus there’s the inference that Gen Y wasn’t making the decision to enter the home ownership market during the period of highest affordability and lowest borrowing costs in nearly a century, unless and until the government stimulated them to do so.

Even while a million REALTORS were shouting to take action. (My observation, not the report’s.)

So the discussion went on. Back and forth, Steve and I explored what the meaning of these trends might be on real estate – today, tomorrow and into the next decade. Does Generation Y still believe in home ownership? Steve rigorously believes so; I’m not so certain. Will they likely buy a home? We both agree they will. The NAR Annual Profile of Buyers and Sellers showed that first-time buyers still made up a big portion – 42% – of the market last year. Yet that number is obviously in decline. Is it only because of the recession? I’m not convinced.

Which brings me to the question of what the industry is going to do if even we’re both right.

Let’s say Steve’s right that Gen Y still believes in home ownership and will constitute a solid “replacement” buyer population for its parents (they are both the same size). And let’s say that I’m right, that this will happen – eventually – but for the next decade, this generation will be deferring that purchase for a variety of reasons like the economy, but also just their way of seeing the world. They might prefer renting for a variety of reasons: job-hopping geographic mobility as they build their careers, a longer “adulto-lescence” without marriage or the need for a local school-system, and some shaken confidence in the benefits of home ownership.

Let’s be even more cautious: Let’s say that Steve is 80% right and I’m only 20% right. What if only 20% of Gen Y are typical of the trends ULI and others are seeing? I think this would still present a massive challenge for the real estate industry, outside of the economy. If we accept that first time buyers have traditionally constituted somewhere between 40-50% of the marketplace, then even a modest 20% drop in that market segment could spell real trouble for REALTORS. If first-time buyers dropped to only a third of the market, and Boomers-driven purchases and sales declined (for obvious reasons, as well as financial freezes), is the residential resale sector of the industry prepared for a delay – perhaps upwards of a decade – in so large a segment of the population?

Moreover, if Gen Y’s behavior cannot be stimulated by mere tax policies, because what they value has changed when they will integrate home ownership into their lifestyles, how will a generation of real estate agents define their value proposition? Will offering a “Free School Report” mean anything to future buyers? What happens if the “rent vs buy” argument isn’t as important as the “save the planet” argument or some more basic reason why the Global generation might not want to be “tied down” for the next fifteen years?

One of the most telling quotes in the Urban Land Report had nothing to do with housing or generational trends. It had to do with what happens to industries over time. It was from the preface to Andrew Grove’s 1999 book, Only the Paranoid Survive:

Sooner or later, something fundamental in your business world will change.

The real estate industry is at what Grove calls an “inflection” point. Something bigger than just the economy, jobs and tax benefits has changed in our industry. The real estate industry is experiencing an evolution in its customers’ attitudes and values, one of which involves the role of home ownership in their lives. It’s a change that’s driven by forces the real estate industry cannot control; it’s also quite possible it can only marginally influence it, too. The current recession will end. Generation Y will eventually grow up. Many will follow in the footsteps of their parents – picket fences and all. Yet there are significant indicators that this process is already being put on hold, and might be delayed for years. The question that remains is whether or not the residential real estate industry is prepared to a ten-year hiatus in replacement-population driven sales.

And that’s one question I don’t think either Steve or I have the answer to.

  • Jack

    Matthew… interesting article that addresses what could bring out a big change in the way we do business. In the 30 years I’ve been in this business I’ve seen a lot of changes. No doubt this will be the biggest game changer yet. Gen Y is a sharp group that appear to be right up on their game and do stay in touch with what is going on! It will be very interesting to see just how this will all roll out? It more than likely will be a very interesting ride and lets hope the ride isn’t too bumpy!

    Jack Doheny

  • Someone has to own the rentals. Maybe the focus of agents should be on the investors that will own the rentals if this scenario does play out with Gen Y deferring for a decade?

  • Actually, I completely agree.. The trouble is that many residential agents “poo poo” doing rentals…

    Sent from Samsung mobile

  • Anne

    Matthew,
    lots of food for thought.

    Here in the UK this is happening already.
    Banks have stalled the mortgage process for 1st time buyers.
    Unless there is a parent to co-sign and guarantee the loan plus having a down payment of between 20-40% they haven’t much hope.( Unless they are willing to pay a higher %)

    In the UK, as in the USA, many have returned from university with large debts and have moved back home with their parents or are renting with friends or partners.
    In a recent survey many said they had lost confidence in the property markets having seen what has happened to their parents home values. ( Unless you live in London which is still showing growth)

    We ( as a staging / design company) are working with UK property developers who have become reluctant landlords while they are struggling to sell their new apartments aimed at 1st time buyers. As rentals they were snapped up and it keeps the investors mollified at least.

    As a parent with 3 girls aged between 25 – 32 everything Matthew and Steve have talked about
    is being echoed by my daughters and their friends.

    We are now doing a lot of work with rental investors who are taking advantage of the market over here by buying distressed properties and adding to their rental portfolios. Most Estate Agents have rental divisions over here but are having to deal with a shortage of properties in the desired areas.

    In the USA we are working with flippers and developers who are bucking the trend and buying, improving and selling fairly rapidly, but that’s another story for another time.
    .
    As you stated, the question that remains is whether or not the residential real estate industry is prepared to a ten-year hiatus in replacement-population driven sales. Like Jack, I’m watching with interest and hope the ride isn’t too bumpy

  • Thanks for your thoughtful reply. I’m most interested to hear your indication that the trends amongst young people appear to be global, as expected. I think there’s going to be a hiatus, and we can still be players in the business. But it won’t look at all like it did a decade a go!

  • Bruce Graham

    Exellent summary of and insightful comments about this very important data. Lots of implications for current and future marketing and communication efforts. Thanks Matt and Steve.
    B. Graham, Prudential New Jersey Properties