Homeowners nationwide expect home prices to continue to increase over the next 12 months, according to Redfin, a national real estate brokerage. In fact, 75% of all homeowners anticipate prices will rise. Further, 86% of homeowners under the age of 35 believe prices will continue to increase.
Most other homeowners think prices will remain level and very few expect prices to drop.
Are young homeowners being overly optimistic about future prices? And, having witnessed their parents’ generation lose enormous amounts of wealth due to the 2007-2008 housing crash, what fuels their positive outlook for the future?
Gen Y’s inherent optimism
This young adult demographic, known as Millennials or Generation Y (Gen Y), has a sunny outlook on all things housing. For instance, 87% of Gen Y surveyed by Trulia claim they plan to be homeowners at some point in the future. This percentage is far beyond what is sustainable or even possible for the housing market. Thus, some of the survey respondents are likely wrong (it is their opinion, after all, which is not necessarily based on facts).
Gen Y’s high level of optimism is at odds with the fact that they came of age during the worst economic crisis in a generation, when scores of people lost their homes and their jobs. Further, most entered the job market at a severe disadvantage and, accounting for inflation, are making less income today than previous generations of young adults. One would expect Gen Y to carry the scars of the housing crash with them into the future and be forever skeptical of the boons of homeownership. But that’s not the case.
Part of it may have to do with the young age of Gen Y, who by and large have their lives ahead of them.
The Pew Research Center’s report on Milennials compared to other generations describes this demographic as “confident.”
For example, 89% of members of this generation who are currently unsatisfied with their earnings believe they will earn enough in the future, according to Pew. This is compared with just 76% of members of Generation X (Gen X) and 47% of Baby Boomers, giving credence to the theory that optimism simply has to do with how young you are. But an important caveat: back when Gen X was young, a similar 77% of those not then earning enough to be satisfied expected to earn enough in the future — basically the same percentage as today’s Gen X.
No matter the cause, Gen Y expects good things from life, including fulfilling their homeownership dreams. But just because they have a feeling, doesn’t make it true.
Don’t let them fool you
Gen Y’s inherent optimism paints a rosy picture for the future of the housing market. But don’t let their sunshine and smiley-face emoji let you forget the real estate fundamentals learned in the recent housing crisis.
Prices don’t go up forever. Over time, prices rise and fall in somewhat predictable fashion, or in real estate cycles.
True, as of mid-2016 California home prices are 6%-10% higher than this same time last year, continuing a four-year stretch of consistently rising prices. But home sales volume has slowed each month throughout 2016 and the Federal Reserve (the Fed) expects to increase interest rates sometime in the next year, both factors likely to drag prices down.
Agents: prepare for the slowdown in prices by over-producing today, when prices are still rising. Put away the excess for leaner months ahead.
But don’t panic! The slowdown expected in 2017 won’t rival that of the 2008 Great Recession. Rather, the dip will be brief and shallow. California’s jobs market is picking up steam and Gen Y is gearing up to become homeowners — not at the high rate they expect, but still — while their Baby Boomer parents are getting ready to retire, sell and relocate. Expect this Great Confluence to occur near the end of this decade, peaking around 2019-2021.