Americans in their 20s and early 30s are getting a nudge toward homeownership a decade after sales peaked during the housing bubble, with rents rising so much that buying is making more sense.
"I pay $1,410 in rent for my one-bedroom apartment in downtown Denver," said Eric Arther, 28, who has saved about $30,000 for a down payment. "If I pay that much, I'd like to build some equity."
Expect the open-house crowds to skew a little younger this spring. Millennials made up 32 percent of the U.S. housing market in 2014, up from 28 percent two years earlier, and have pulled ahead of the older Generation X as the largest segment of buyers, according to the National Association of Realtors.
Purchases by younger buyers are likely to grow gradually as millennials work through hurdles such as student debt, lack of down-payment funds and later family formation than previous generations, said Jed Kolko, chief economist for real estate website Trulia, a unit of Zillow Group Inc.
"We are at the beginning of a multiyear period where more young people become homeowners," Kolko said in a telephone interview. "But I think it will happen more slowly than most people expect."
First-time buyers made up 29 percent of previously owned home sales in February, up from 28 percent in January and the first increase since November, the National Association of Realtors reported this week. The share of new buyers fell last year to its lowest level since 1987, according to the group.
About 5.2 million renters say they expect to purchase a house in 2015, up from 4.2 million a year earlier, a reflection of the improving economy, according to the Zillow Housing Confidence Index released this month. The share of renters ages 18 to 34 who want to buy grew in Atlanta, Chicago, Dallas, Detroit, Las Vegas, Minneapolis, Phoenix, San Francisco, Washington and Tampa, Fla., areas where job growth has been strong, according to the survey of 10,000 households in 20 cities.
While limited inventory, tight credit and down-payment requirements make it hard for many millennials to buy a house, soaring rents and the likelihood that the Federal Reserve will increase interest rates later this year may drive more of them to explore buying, said Stan Humphries, chief economist at Seattle-based Zillow Group.
Humphries said he expects rent increases to outpace price gains by the end of the year as higher mortgage rates limit affordability and the rental market remains tight. The U.S. rental vacancy rate hit a 21-year low at the end of last year, according to the Census Bureau, giving landlords leverage to charge more.
"We're seeing increased interest from renters in homeownership," Humphries said. "That's going to coincide, more than likely, with increasing mortgage rates as the Fed gets ready to probably increase the target rate this summer."
The central bank said last week that it would consider raising the benchmark rate as early as June and dropped from its statement a pledge that it would be "patient" on the timing of its first increase since 2006. The Fed's stimulus has kept home-loan costs near historic lows.
Effective apartment rents, or what tenants paid after landlord incentives, jumped 4.6 percent in the fourth quarter from a year earlier, a pace that will be repeated for the first quarter, said Greg Willett, vice president of MPF Research, a Carrollton, Texas-based apartment-data firm. Leasing costs have climbed from a year earlier in every quarter since 2010, he said.
Demographics and the strength of the job market probably will be the biggest drivers of home sales for millennials, Willett said. The unemployment rate for adults ages 25 to 34 fell to 5.4 percent in February from a high of 10.6 percent in October 2009, Labor Department figures show.
The U.S. has about 75 million millennials -- people born from 1980 to 1995 -- a group expected this year to surpass the baby boom generation in absolute numbers as immigrants swell the younger group and boomers die off, according to a January report by the Pew Research Center.
"We're just now hitting the point that the oldest of millennials are in their early 30s, which would be about time for them to make those moves," Willett said. "The question is, do they have money for a down payment?"
Young people are getting squeezed because the gap between rents and incomes is widening to an unsustainable level in many areas of the country, according to a study this month from the National Association of Realtors. In the past five years, the typical rent jumped 15 percent, while the income of renters increased by just 11 percent.
Sales are still subdued around the country as wages grow slowly. Previously owned homes, which make up about 90 percent of the market, sold at an annual pace of 4.88 million in February, less than the average of 5.27 million dating to 1999, according to the Realtors association.
Business on 03/26/2015