The idea of homeownership as an aspirational goal may no longer carry much weight as college graduates enter the work force saddled with high student loan debt and older Americans focus on retirement.
Rod Dubitsky, an analyst with PIMCO, said the overall question that looms large over the mortgage industry is: Who is going to buy housing in the next 10 years?
In a report titled, “Are There Any Rungs Left on the Housing Ladder?”, Dubitsky dives into demographic data, painting a bleak picture for home sellers who are largely dependent on two groups of buyers: veteran homeowners who now have less desire to buy homes as they focus on retirement, and young buyers who are getting paid less while carrying significant student debt.
In downturns, markets generally look to first-time homebuyers to pull the levers of demand, but Dubitsky says the housing economy should not be overconfident when focusing on this group.
Why the change? According to Dubitsky this demographic is struggling financially, pushing them on a lower rung of the housing ladder. While in the past, the young demographic functioned as the market’s first-time homebuyers, today they are more likely to be long-term renters based on their financial situations.
Dubitsky said the ability of these borrowers to make their way into the housing market is contingent on whether they have the opportunity to save money. But the statistics on this point remain grim with the average student debt now equal to a 15% down payment on a median-priced home.
“We believe that some amount of the reduction in graduate earnings power and rise in debt is a longer-term phenomenon that could serve to limit college graduate home purchasing power for the foreseeable future,” the report concluded.
The younger demographic is not the only group falling down the ladder. While young buyers are now more likely to rent than own, older homeowners are less likely to upgrade into larger homes or invest in second properties. Many older workers are aware they have to contribute 10% more of their pay to their retirement savings, which means less disposable income.
“This could be manifested in permanently postponed home purchases, reduced tendencies to upsize, lower likelihood of buying a retirement home, more affordable post-retirement rental choices,” according to Dubitsky. “All of this suggests downsized housing choices — one home instead of two, rent rather than own, smaller place rather than large. These choices could serve to reduce the dollars committed to housing investment.”