The number of 25-34 year-olds — the typical age of first-time homebuyers — in California increased over 2% in 2017. A combined average of 34% of this age group owns a home in California, compared with 38% of this age group who owned a home at the height of the Millennium Boom.

Meanwhile, California single family residential (SFR) and apartment construction, while still historically low, continues to increase. SFR construction continues to rise gradually in 2018, while multi-family construction has rebounded slightly after a down year in 2016. Both types of construction still languish far below Millennium Boom levels.

This slow pace of construction starts is in part a reflection of Gen Y’s delay to become homeowners. However, once this generation feels financially secure in their careers and the state’s economy, their appetite for shelter will accelerate, expected in the years following 2021.

Updated September 26, 2018. Original copy posted March 2009.


Chart updated 9/26/18

2017 2016 2015
Estimated Pop. Aged 25-34
6,023,800 5,887,500 5,835,700
SFR Construction
58,000 49,400 44,100
Multi-family Construction
53,800 51,200 53,500

All forecasts are made by first tuesday based on current data, influential factors and market trends.

This chart plots two factors from 1980-2020:

  • the age group of first time homebuyers, aged 25-34; and
  • the annual construction starts of SFR units and apartment units.

Each factor affects annual sales volume, and in turn pricing, of single family residences (SFRs) in California. Forecasted numbers for the 25-34 age group through the year 2020 are extrapolated by first tuesday based on data from the California Department of Finance.

Noteworthy observations:

  • the numbers for the 25-34 age group last peaked in 1991 and 1992, consisting of members of the Baby Boomer generation;
  • the number of first-time homebuyers will peak again in the years following 2021, and will be made up of members of Generation Y (Gen Y) or “Millennials.” This generation is comprised of the children of the Baby Boomers. Their impact on the housing market will be delayed or dampened due to high levels of student debt and their delayed entry into the labor force.

Housing starts in the 1980s for both SFRs and apartments outran demand by the end of that decade. This excessive supply caused housing starts (and prices) to crash in 1990 and 1991. The rise in foreclosures precipitated by the accompanying housing downturn was limited due to the housing demand of Baby Boomers who were still forming households in significant numbers.

Once those households formed, demand led to a correspondingly strong absorption rate (for a recession) of the excess supply of homes which remained unsold and unrented from the late 1980s.

In contrast to the 1989 construction peak of 163,000 SFR starts, the recent peak of 155,000 SFR starts in 2005 (5% lower than 1989) was supported by 9% fewer homebuyers in the 25-34 age group. Worse, the steady expansion of the first-time homebuyer age group will not start supporting current home sales volume levels until about 2018 when the age group will develop more financial maturity.

Even then, they will wait longer to form households. Their entry will be small compared to the massive effect their Boomer parents had as they consumed their way through new construction at the 1989 construction peak.

The willingness to own one’s housing

Due to cheap and easily-obtained mortgage money, support for the excessive construction of new home sales in 2005 came from short-term speculators (and quasi-speculative second home buyers). These speculators made up nearly half the buyers in 2005. They were not users of the SFRs they purchased and pulled off the market.

Their activity contributed to the freak and dramatic rise in sales volume, prices and construction. The real estate recession later yanked the speculator’s self- made spasm of support from the housing market. Many of these properties were dumped back on the market directly or as real estate owned (REO) properties. Others that were encumbered were converted to (negative cash flow) rentals. All the while, levels of first-time homebuyers remained very low. As a result, construction starts from 2007-2011 were at their lowest level since 1950.

Compounding the chaotic overbuilding from 2000-2007 was the federal government’s housing policy, based on a goal of driving homeownership from 67% in 2000 to 70% of the households in the United States by 2008. As a result, persons qualified only to be tenants purchased homes they were unable to own, financed by mortgages they did not understand, with repayment terms impossible to sustain. These were the zero ability to pay (ZAP) loans. When resale was not an option, owners faced with a negative equity defaulted, exercising their only viable option.

These homes have mostly returned to the MLS market and been sold. Over 1,000,000 foreclosures were completed from 2007-2014. Foreclosures continue at a reduced pace in 2016, expected to rise again in 2016-2017 concurrent with the rise in mortgage rates and slip in prices.

These California homes, as they go to short sales, or less frequently to foreclosure sales and into REO inventory or speculators inventory (bought at trustee’s sales), will eventually be placed back on the market and consumed by homebuyers (and many buy-to-let property investors). Hordes of speculators acquired MLS inventory in 2012 and 2013 and they will be joining these resales as they flip their inventory. Only when these speculator-inspired acquisitions are cleared out will the next boom in real estate sales be possible.

In spite of the negative equity homes that still made up 3.2% of California’s mortgaged homeowners at the end of 2017, many of the forces holding back the expansion in the housing market are likely to be neutralized by 2018. By then, Gen Y in part will have found a foothold in the jobs market and have been able to save money for down payments. This uptick in Gen Y household formations will trigger demand for an increase in new home starts (and great numbers of apartments) which will peak around 2021-2022.

All of this action in the 2010s will be tempered by the return of:

  • mortgage lenders to real estate lending fundamentals;
  • somewhat independent fee appraisers; and
  • cautious builders.

This group will be wary of getting burned again so soon after the 2008 recession.