Economy Watch: Why Homebuilders are Relying on Millennials

Home builders are still fairly confident about the state of their industry, whose health affects a number of other kinds of real estate. Should they be?

Home builders are still fairly confident about the state of their industry, whose health affects a number of other kinds of real estate. Should they be? Considering that the economy’s been soft lately and—as a longer-term consideration—that Millennials still seem reluctant, seemingly as a point of generational solidarity, to form households at the same pace as their elders once upon a time, maybe not. The homeowners need the Millennial trade for their long-term health. Not that Millennials per se would buy that many new houses, but the new housing market does depend in large part on younger buyers taking older houses from older sellers, so those older sellers can turn around and buy new houses—which tend to be more expensive.

Even so, the National Association of Home Builders released its NAHB/Wells Fargo Housing Market Index on Monday, and builder confidence in the market for newly built, single-family homes in May still came in at 54, down two points. That’s still higher than the threshold of 50, meaning that more builders are optimistic than not. This time last year, nearly the reverse was true: the May 2014 reading was 45. The index’s components were mixed in May 2015. Sales expectations in the next six months rose one point to 64; the index gauging buyer traffic dropped a single point to a sluggish 39; and the component measuring current sales conditions decreased two points to 59.

Note that expectations are high. Maybe homebuilders are convinced that former generational home buying patterns will not change—namely, that people will buy houses in greater numbers when they start having children. It’s just that Millennials will take a little longer to get around to that part of their lives, and thus it will take longer for them to become the buyers (and it’s also worth noting that Baby Boomers got married and started families later than their parents, as a rule; so there’s a precedent). But when Millennials eventually do pick up the pace of household formation, their large numbers will probably be enough to help sustain growth (directly and indirectly) in the new housing market.

Will the spectre of student debt weigh down home buying? According to a study released by credit agency TransUnion this month, that doesn’t seem to be the case. The study found that consumers in their 20s with a student loan in repayment are “generally able” to qualify for credit. Not only that, that group tends to perform as well or better on those new loans as people of the same age without student loans—a pattern of behavior that’s a major factor in eventually getting a mortgage. In other words, the loans are a extra burden, but not a killing one in terms of homeownership. To come to this conclusion, TransUnion studied borrowers with student loans who entered repayment from three very different periods: the fourth quarter of 2005 (pre-recession); fourth quarter of 2009 (recession); and fourth quarter of 2012 (post-recession).