Younger Home Buyers Challenge Housing Market Norms, Alter its Landscape

The housing market may be in a slump, but the industry’s long-term trends look promising as younger generations begin to buy and trade up.

That was the consensus among consultants, analysts and developers speaking at the recent annual meeting of the Urban Land Institute in Denver.

Rising affordable housing concerns in some home markets remain a challenge, but the generations coming up behind the baby boomers are giving home builders a run for their money.

With more immigration and people living alone, demographic shifts are pressing developers to reconsider what’s worked in the past.

Generation X, typically defined as those born between 1965-1979, comprise a little more than half of the market for newly constructed homes.

But that doesn’t mean the homes that lured baby boomers, born in 1946-1964, are meeting the needs of the 30-somethings shopping now.

“Generation X is in the heart of their entry-level home-buying years and are just now entering their peak trade-up years. They haven’t yet stolen the thunder of the boomers when it comes to trade-up homes. It’s a big shift coming up for home builders and developers,” said James Chung, president of Reach Advisors, a Boston-based marketing research firm.

Partly because many Gen-Xers are buying into the market after the run-up in housing prices began about a decade ago, they tend not to be as moved by deluxe kitchens, huge square footage and “prestige addresses” as their older counterparts were.

With home mortgage loans costing what they do now, younger buyers are willing to make sacrifices because they are essentially required to.

“It’s the trade-off generation. It’s no longer sort of the live-large mindset. They’re living under different economic realities than their predecessors. They carry 70 percent more debt than the baby boomers did at that point in their lives because of the cost of mortgages… Almost all their debt is housing debt,” Chung said.

“What we’re seeing is a fundamental mismatch between what these buyers are wanting and what the market is offering. They’re settling for what’s available vs. finding what they really want.”

As for Generation Y, also know as the “echo boomers” born after 1980, it’s premature to draw conclusions, said Gadi Kaufmann, CEO of Robert Charles Lesser and Co., a real estate advisory firm.

“Gen Y is going to be in student housing and rentals for the next six years,” he said.

Also affecting home builders and developers is the rise of non-traditional households. The portion of people living without a spouse or roommate grew 23 percent since 1980. Only 22 percent of households were made up of a single person living alone in 1980 compared with 27 percent in 2005.

A 57 percent rise in single-parent households and a 26 percent decline in the number of married couples with kids — 23 percent last year compared with 31 percent in 1980 — has further changed the housing landscape. There’s also more migration from expensive cities to less costly areas, as well as people moving out of their hometowns.

Southern states and those bordering pricey ones, like Arizona and Nevada, are the beneficiaries of home buyers who can’t afford to live in, or become disenchanted with higher-priced areas such as California and the Northeast.

Younger people also tend not to mind close living. As more people live alone and wait longer to marry and start families, many in their 20s and 30s are drawn to compact apartment, condo and multi-family home units in urban areas where they can interact with neighbors.

Whether the housing market has hit a bottom or not remains controversial.

Last week, the U.S. Commerce Department reported that the nation’s economy grew at a preliminary annual rate of 1.6 percent from July-September, its slowest pace since early 2003 due to cooling in the housing market.

Though the housing market may be in the doldrums, Chung is confident that Americans’ love affair with home ownership will endure even after this recent extreme swing in demand.

“From 2003-2005 it wasn’t just a love affair with your primary home. It was a torrid affair with real estate. It was your home plus your home on the side,” he said.

With the current state of the market, and experts’ predictions that home mortgage rates will remain low through the end of 2007, it will be interesting to see if housing demand will soon be back in full force.