The number of 25-34 year-olds — the typical age of first-time homebuyers — in California remained flat in 2019. A combined average of 35% of this age group owns a home in California, compared with 43% of this age group who owned a home in 2006 at the height of the Millennium Boom.
Meanwhile, California single family residential (SFR) and apartment construction continued to decline in 2019-2020. SFR construction declined 16% in 2020 and multi-family construction starts fell 28% from the prior year. Both types of construction decreased due to 2020’s historic job losses and the social distancing necessitated by the pandemic. However, even before 2020, total construction starts languished well below Millennium Boom levels.
The slow pace of construction starts over the past decade has been partly due to 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 to peak around 2024-2025, at which point the next generation of young homebuyers — Gen Z — will be entering the housing market in earnest.
Updated February 8, 2021. Original copy posted March 2009.
Chart updated 02/08/21
| 2019 | 2018 | 2006: Millennium Boom peak | |
| Population aged 25-34 | 6,036,000 | 5,887,500 | 5,173,400 |
| SFR construction | 59,200 | 62,600 | 108,000 |
Multi-family construction | 50,700 | 53,800 | 56,300 |
All forecasts are made by first tuesday based on current data, influential factors and market trends.
This chart plots two factors:
- 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.
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,” and will gradually be taken over by members of Gen Z. This generation is comprised of the children of 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 162,700 SFR starts, the recent peak of 155,300 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 and enlarging current home sales volume levels until 2021-2023, when the now financially mature age group will finally be willing to enter the housing market in large numbers.
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 one million home foreclosures were completed during the foreclosure crisis and elongated recovery from the 2008 recession in California. Foreclosures hit their bottom in 2014-2016. Looking forward, foreclosure numbers will remain low and steady until the next economic recession arrives, expected in 2020. The home price increases experienced in 2012-2020 have lifted all of the state’s previously negative equity properties above water.
Just 1.5% of mortgaged homes remain underwater in California in the third quarter (Q3) of 2020. Gen Y — wary of getting burned by the housing market like their Boomer parents were in the 2008 recession — are weighing their options in 2021. Rapid home price increases from 2012 through 2020 made it hard for first-time homebuyers such as themselves to keep up. But now that prices have begun to cool, many will choose to wait out the market, not buying until it is clear that prices have reached a bottom.
Once home prices do bottom — expected around 2022-2023 — Gen Y homebuyers will drive the market. Previous upticks in Gen Y household formations have increased rental demand, triggering a jump in multi-family/apartment starts. This time, new single family residential (SFR) starts will take occur as tenants shift to homeownership — leaving periphery apartments vacant and in foreclosure.
All of this action in the early 2020s 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.
The construction peaks in the 1980’s were caused in part by federal tax policy – limited partnership programs in the first half of the decade and then the 1986 tax reform which favored home ownership rather than portfolio investment. Might this or other external factors be the cause in other peaks and valleys?