How wage stagnation has turned the housing equation upside down
Fifty-two percent of non-home millennials aren’t saving for a down payment. And among these, many cite underpaid jobs or unemployment as the reason.
In this article describing some of our research on American millennials and their quest to become homeowners, I would like to provide an overview of the broader macroeconomic issues that have influenced their experiences and attitudes. Their incomes, and in particular the long-standing wage stagnation, have contributed to their inability to take the decisive step towards real estate ownership. In short, wages have advanced only hesitantly while house prices have made stratospheric leaps.
For this study, we only surveyed millennials who were not yet homeowners. Since our results only apply to the cohort of non-owners of this generation, this could mean that the population we studied is not as wealthy as their generational cohort of owners. But even with that qualification, we’re still looking at a significant majority – according to a 2021 study, just 43% of millennials were homeowners, the lowest homeownership rate of any generation, and well below the overall average of 65%.
For more than four decades, wage stagnation has been a persistent reality in the United States, and wages have not kept up with the cost of living. According to 2019 research from the Economic Policy Institute, the federal minimum wage was 17% less than it was 10 years ago, and 31% less than in 1968. If the minimum wage had kept pace in productivity since 1968, it would now be $ 24 an hour. Indeed, in May 2021, Bank of America announced that by 2025, its minimum wage would reach $ 25 an hour. Even if this is a step in the right direction, it is still doubtful whether the increase will bring workers into line with the soaring cost of housing.
Home prices continue to rise
Let’s see how rising house prices exceed wage increases. Looking at the galloping escalation in US house prices, the most recent S&P CoreLogic Case-Shiller report found that house prices in October were up 19.5% year-on-year, nearly matching the peak July’s 19.7% jump, the biggest jump in more than 30 years. . Since 2012, Millennials’ incomes have increased 24%, while house prices have climbed 86% and continue to rise. It’s no surprise that in our own research, 56% of Millennials said homeownership where they currently live is “difficult” or “extremely difficult” to afford. One of our survey respondents made this comment:
“It’s difficult given the increases in the cost of living relative to the salary increases. Personally, I can’t save a lot of money because about 60-70% of my income is spent on rent and other bills. ”
Common sense suggests that this number should be reversed. Students know from personal finance courses that they shouldn’t spend more than 30 percent of their income on housing and basic living expenses. Our research showed that 66% of full-time workers and, overall, 80% of our respondents reported incomes below $ 60,000 per year. With millennials earning an average of $ 47,034 per year in March 2020, that would mean a combined mortgage, insurance and property tax payment of no more than $ 1,175. In today’s housing market – and that would be assuming the buyer saved 20% down payment – the average millennial in the $ 47,000 range might be able to qualify for a home. priced at around $ 220,000.
But with the pandemic causing widespread out-migration, the average price of homes has risen even more sharply in the past two years. In May 2021, millennials faced a typical home price of $ 287,148, a record 13.2% from the previous year. Pandemic competition for homes, even in small towns like Bethlehem, Pa., Has created a price spike.
And wages have stagnated
Among survey respondents who said they were not saving for a down payment, many cited underpaid jobs or unemployment as the reason. Latest economic data shows wages are only rising in spurts: Data from the November 2021 jobs report showed hourly earnings rose 0.3% month over month, the smallest increase in average hourly earnings since last March. In contrast, the CPI (consumer price index) for November showed that the price of goods was up 0.8% per month and 6.8% year-on-year. November is just a snapshot in the midst of an ongoing story of wages not keeping up with daily costs. As we see, rising house prices far outweighs wage increases.
A millennial commented:
“Stagnant salary growth and rising student debt have made homeownership beyond the reach of many of my generation, especially those who live at HCOL. [high cost of living] areas. I would love to own a home, but I can’t realistically see how that would be possible where my husband and I currently live – and we work in tech and earn living wages! ”
Unfortunately, the salary of this survey respondent was the exception and not the rule. In addition, there is a deep belowemployment problem. When we conducted our survey, it found that only 48% of middle-aged millennials (30-35) worked full-time; 13 percent of this group reported being unemployed, and 7 percent were temporarily unemployed between jobs. Among recent millennial college graduates, only half of those we interviewed were able to find a role that matched their skills and education immediately after graduation. One in five (19 percent) made it to a graduate position, and 28 percent were still looking.
Our aggregate employment data, encompassing those working full time and part time across all millennial age groups, is only 63%, with 51% working full time. It’s no wonder that 50% of Millennials we surveyed have less than $ 2,000 in savings, and half of them (25%) have less than $ 100 in stash. The picture becomes sharper when we see that over a third (34%) of millennials we studied and a quarter (26%) of mature millennials earn less than $ 20,000, which is probably a combined effect of underemployment and underpayment.
Our research has shown that almost half of middle-aged and mature fully employed Millennials – employees nearing their prime earning years – earn less than $ 50,000 per year. A quarter of Junior Millennials (25 to 29) working full time earn less than $ 30,000 per year. Only 30% of Millennials earn more than $ 50,000, and $ 100,000 is a rarity.
Looking at the big picture, including the affordability of housing in large urban areas, it would be difficult to argue that the millennials we interviewed earn a living wage, which in 2020 was calculated to be $ 68,808 per year. year. In our three subgroups, those who could possibly afford to buy a home (we estimate with salaries of $ 50,000 or more) represent only 47%. The stagnation of wages has clearly had an impact on the ability of the younger generations to increase their wealth, starting by accumulating enough of a nest egg to access the housing ladder.
In the next article, I’ll cover what has become something of an elephant in the room: the millennial view that older generations, and baby boomers in particular, are hampering their dreams of buying an affordable home.