Millennials now make up the largest portion of prospective home buyers, outnumbering baby boomers and Generation X — but they’re struggling to buy homes.
The reasons for this are deep-seated and systemic. On one hand, millennials entered the housing market late. (Remember all those articles from a few years back about how millennials weren’t buying houses?) As a result, they may not be familiar or comfortable with the nuts and bolts of the home-buying process. Many millennials don’t understand the role that real estate agents play, and some may not even know how to find a real estate agent.
But that’s not the whole picture. We’ve heard a lot about inflation over the past year, but home prices have been quietly inflating for decades. If home prices had grown at the same rate as inflation over the last fifty years, the median home price today, in 2022, would be $177,788 — instead, it’s $408,100, 150% higher than inflation over that period.
To put it another way, inflation has increased 644% since 1970, while home prices have increased a staggering 1,608%.
A new study from Anytime Estimate dissects why home prices have shot up so rapidly, looks at millennial purchasing power compared to previous generations, and lists the most (and least) affordable cities for home buyers. Let’s go over some of the findings.
Home Prices Are Outpacing Inflation — and They’re Accelerating
To understand why millennials are having trouble buying homes in 2022, we have to look at what’s happened with home prices.
Home prices have outpaced inflation since the 1970s, but the line on the graph hasn’t been steady. Home prices have spiked dramatically since 2000, growing 121% faster than the cost of general goods. In 2020 and 2021 — a period of abnormally high inflation — home prices rose 168% more than overall inflation.
The upshot? The housing market is expensive — and it’s rapidly getting even more expensive. To make matters worse, millennials are entering the market with less purchasing power than previous generations.
Millennials Face a Steep Price-to-Income Ratio
Price-to-income ratio is a metric that tracks home prices alongside average incomes, allowing observers to gauge affordability. According to this metric, millennials are not only confronting high home prices, but they’re doing so with meager incomes.
Back in 1985 (when many baby boomers turned 30), the median sale price of a home was $82,800, while the median household income was $23,620. Put those figures together and you get a price-to-income ratio of 3.5. This means that the average home cost 3.5x the average U.S. household income in 1985.
That price-to-income ratio of 3.5 isn’t ideal — financial experts suggest that a ratio of 2.6 is best to avoid financial stress. And for that average boomer of 1985 to afford the median home with the suggested price-to-income ratio of 2.6, they would need an income of $31,850, 35% higher than the median income.
Now let’s look at millennials.
The average millennial turned 30 in 2019. That year, the median sale price of a home was $313,000, while the median household income was $68,700 — which produces a discomfiting price-to-income ratio of 4.6. At close to double the suggested ratio, that means the average millennial buying the median home is under considerable financial stress.
To achieve a 2.6 price-to-income ratio, millennial buyers would have to make $120,400, 75% higher than the median income.
The data shows homes aren't only becoming less affordable — they're becoming a luxury item.
The Last Islands of Affordability
There are some exceptions to these trends. If you’re willing to buy some boxes, make a moving checklist, and load up the U-Haul, you could relocate to an affordable city.
Of the 50 biggest U.S. metros, only eight have seen home-price increases of less than 100% since 2000. Four of them have seen increases of less than 75%: Cleveland (60%), Detroit (62%), Memphis (72.7%), and Chicago (73%). Homes in those cities are somewhat pricey, but still affordable.
Steer clear of the cities on the other end of the spectrum when looking for affordability. California cities San Francisco (290%), Los Angeles (280%), Riverside, (278%), and San Diego (275%) have seen astronomical increases since 2000.
In the end, this challenging new market has forced millennials to adapt. Some have turned to making money by renting rooms in their house, while others have decided the cheapest way forward is to build a house themselves. The point is they’re finding ways to make it work — for now. For millennials, owning a home is tough but still within reach. But if home prices continue to rise at the present rate, homeownership may be completely out of reach for the next generation.
Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.
Education: B.A. with Honors, Political Science — Stanford University