We're nearing the end of National Homeownership Month and from where things currently stand, the good and bad news for the housing industry is, unfortunately, the same news.
To make housing more affordable for millennials who eventually would like to form their own households, the housing industry must be more creative in the housing it creates, and local housing policies must be more flexible about the types of housing that can be built in communities, especially in desirable urban neighborhoods.
Declining homeownership rates are the biggest challenge the mortgage and housing finance industries currently face. The housing industry is also staring down a generation, the millennials, with the numbers that could turn that situation around.
A promising solution for renters looking to buy, who are willing to trade space for place, is micro-housing, a form of niche housing that is environmentally friendly because of its smaller size. Micro-housing units are generally less than 500 square feet. Micro-housing appeals to young single professionals who have stable income but minimal savings.
Approximately 90% of micro housing rental units are located in high-density urban areas and the typical micro-unit occupant is a young professional and first-time renter, who is willing to exchange square feet for closer proximity to an urban community. Micro-housing in the form of accessory dwelling units (also called granny flats) are also appealing to boomers who want to downsize and live in an independent, smaller housing unit near their children and grandchildren.
Rental micro-units can provide relief to the growing number of renters who cannot afford to buy a house and cannot find affordable rental housing. In addition, given the growing number of cost-burdened Americans who are now spending half of their income on rent, micro rental units may be one way to help them pay less now, and save money for a down payment to buy a home.
Local zoning officials and planning boards make it difficult for developers to build micro housing units or place micro housing in high density neighborhoods. Neighbors who live in single-family detached homes routinely resist efforts to place micro-housing in their neighborhoods, often because of concerns about congestion and parking. To cap it off, lenders tend to refuse to finance houses that are smaller than 500 square feet.
Homeownership rates have been falling since 2005, and the current rate of 63.8% is the lowest since 1989. Most first-time home buyers are between the ages of 25-34. Unless housing becomes more affordable, homeownership rates for other generations — especially the millennials — will not equal Boomer levels anytime soon, if ever. We must seriously rethink existing options and devise additional alternatives to what the traditional American home has looked like, or how it has traditionally been purchased.
Although there is a small percentage of Generation Y that has set out to become homeowners, obstacles persist. Young adults possess well-documented mountains of student loan debt, tend to be underemployed, and often toil for wages that won’t buy them as much in the housing market as their parents' wages did when they entered the homebuying process.
While some Gen Y and millennial couples have chosen homeownership over marriage and some single women are choosing to buy homes before they marry, a growing number of millennials barely have enough of a nest egg to move out of their parents' homes and start renting.
A lack of savings and stagnant wage growth are the largest deterrents to homeownership for millennials. But, millennials are also increasingly choosing to rent because they want to be closer to their workplaces and to entertainment and because they prefer to live in urban centers that are more walkable. Unfortunately, for many millennials, renting in urban areas is becoming difficult because rental housing in trendy, desirable locations is becoming increasingly unaffordable.
The number of renters in the U.S. has increased by double digits since the recession, and results from a recently released study show that renters are now the majority in nine of the eleven largest U.S. metropolitan areas. While the unemployment rate continues to fall, wage growth and the number of rental units have not kept pace to meet the heightened demand for rental units, and the increase in rent.
Whether baby boomers age in their current homes or downsize to smaller homes, the housing industry will never recover from the Great Recession if millennials continue to struggle to find affordable homes or apartments. Micro-housing is only one of many possible solutions. Bold and innovative thinking by local political leaders and mortgage finance professionals will be necessary to address the growing concerns of a generation that is poised to overtake the numbers of their predecessors.
A. Mechele Dickerson is a law professor at the University of Texas-Austin.
