Will first-time homebuyers save California’s homeownership rate?

California’s typical first-time homebuyer population (aged 25-34) grew slightly in 2018, just over 6 million. This population is up 17% from before the 2008 recession, and growing.

Despite the growing first-time homebuyer population, the past decade has seen a sunken homeownership rate. In 2018, the state’s homeownership rate rebounded slightly to 55.2%. Still, this is well below the recent 2006 peak of 60.7%, having fallen with the conclusion of the Millennium Boom. Rising levels of student debt, increased rents and low for-sale inventory have made it difficult for today’s young generation of first-time homebuyers to break into the market.

California’s homeownership rate will remain near its present level until after the next recessionary period. With the conclusion of the next recession, forecasted to arrive in 2020, the next wave of now-tenants will enter the market as homebuyers, at which time the homeownership rate will grow gradually.

Updated September 10, 2019. Original copy posted March 2013.

Chart update 09/10/19

Do first-time homebuyers influence the homeownership rate?

Over the past decade, first-time homebuyers have had a minimal (positive) impact on California’s homeownership rate. Homeownership dropped even as the number of 25-34-year-olds (the typical age of first-time homebuyers), rose. This age group, which currently consists of members of Generation Y (Gen Y), has had little positive effect on homeownership since the crash. Why?

Homeownership enemy #1:  Unemployment and under-employment

The biggest obstacle for Gen Y has been employment. Or rather, lack of employment. Diplomas in hand, Gen Y sought out work only to be disappointed by California’s job market, stuck in the throes of recession and extended recovery. Some returned to school in order to defer education loans. In the process, they took on more debt than any other generation and further pushed off homeownership.

Over six years after the recession ended (in mid-2014), California finally regained all jobs lost to the crash. However, at the state’s annual rate of working-aged population growth, jobs won’t truly catch up until 2019.

In the meantime, young would-be homebuyers have only begun to start saving for their first home purchase. Many Gen Y-ers have solved their late employment dilemmas by moving in with friends or family.

Homeownership enemy #2:  Student debt

Heavy loads of student debt are also part of the problem. Payments on all debt cannot exceed a standard 41% back-end debt-to-income ratio (DTI). This includes the mortgage, auto loans, credit card debt and education loans. Most college grads will have to clear their student debt before qualifying for a home loan, or settle for a significantly smaller mortgage. This process of paying back student loans typically takes ten years.

The headwinds facing Gen Y mean notions of the typical first-time homebuyer need to be revised. Therefore, in today’s economic climate, the 25-34 age group may be too young for targeting as first-time homebuyers. Instead, 30-40 years might be a better range for the typical age of future first-time buyers. (The average age for first-time homebuyers is 30-35 years of age, according to the reader poll, above).

Members of Gen-Y will likely begin their foray into the housing market following the next recession, expected in 2020. Together with formerly distressed homeowners-turned-tenants, they will gradually drive up the homeownership rate.

City lights

And the flip side of the demographic coin? As Baby Boomers begin to retire, those who own homes will, on the whole, remain homeowners. Their sale and repurchase of a home will have no influence on the homeownership rate. Boomers will replace their large, suburban homes with shelter more suited for their Golden Years. These homes will be smaller, newer, but nearly the same price as the one sold (or leased out). They will most likely be in areas near their younger family members – more often cities.

Gen Y will find their homes in urban areas for a few key reasons. Urban areas:

• have more available high-paying, high-skill jobs;
• boast centers of culture and entertainment; and
• provide easy, cost-effective commuting.

As a consequence of the urban shift, much of Gen Y will remain renters as before. Urban homes are more expensive due in part to their prime location. The price spread is further influenced by zoning, which restricts building density. Lack of density constricts building, which in turn inhibits competitive pricing. Restrictive zoning limits residential high-rises in spite of migration trends towards city centers. As first-time homebuyers enter the market around 2018, the mark they make on the homeownership rate will be limited by local government policy decisions.

The new normal?

California’s homeownership rate has always been low when compared to the nation’s. As of 2017, it has the second-lowest rate in the nation, at 54.4% (only above New York). Will it always be this way?

Glancing at the chart, it is clear that the high homeownership rate achieved during the Millennium Boom was an abrasive anomaly. It rose so high due to a perfect storm of government housing subsidies and deregulated access to funds. Re-regulation will ensure this won’t happen again – at least until we forget.

The next wave of first-time homebuyers will arrive later and in smaller numbers than expected. Still, agents can prepare to cater to this population by focusing their efforts in urban areas. Or, for the more versatile agent, property management may be the answer as the number of renters increase.

The homeownership rate will remain around 55% through the end of this decade, declining heading into the next recessionary period of 2020-2021. Well-prepared and creative agents will thrive in this new real estate paradigm.