One Big Reason Millennials Want Smaller Homes—And It Could Change the Housing Market

published Sep 25, 2017
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(Image credit: Anna Spaller)

Ok, so maybe millennials aren’t settling in cities en masse like we thought they were. However, they’re still changing the housing market in small but important ways.

We know today’s young adults are getting married much later in life than past generations, for instance, and they’re buying homes later, too. One reason some millennials are delaying these milestones is suffocating student loan debt: A recent study showed indebted college graduates are delaying their first home purchase by a median of seven years.

Continuing a trend that’s been in progress since at least 1970, millennials are also having kids later — if at all. The US fertility rate has dropped to its lowest point since the Centers for Disease Control began keeping track over a hundred years ago, and that shift is most evident among millennials: From 2011 to 2015, the number of 30- to 34-year-olds without children at home rose by 4%, according to Census data; among 25- to 29-year-olds, that figure grew by more than 5%.

And that will have a long-term ripple effect on the housing market, some experts say. Because in addition to putting off home purchases, a fair number of millennials who never have kids will likely have no use — not now, and not even 10 years from now — for a large house with four or more bedrooms. Households without kids tend to gravitate toward smaller homes, condos, or townhouses near city amenities rather than oversized single family homes on sprawling lots.

“The fact that we’re having smaller-size families naturally means that the demand for smaller-size housing would get greater interest than before.”

“The fact that we’re having smaller-size families I think naturally means that the demand for smaller-size housing would get greater interest than before,” Lawrence Yun, chief economist for the National Association of Realtors, told the Washington Post.

Sara Moran’s realtor tried to convince her and her husband to buy a larger home with a bigger yard, she told the Post. But she said they’re just fine with their 1,200-square-foot, two-bedroom Colonial in Stratford, Conn. “Because we’re not going to have kids, I don’t really worry about having a big yard. Same with having more room,” she said.

A 4% or 5% increase in childless households among millennials doesn’t really sound like a big deal. But even small differences can add up to big market shifts, considering the Harvard Joint Center for Housing Studies expects there to be 40 million millennial households in by 2025.

And they’re not the only huge American generation that’s increasingly kidless. As baby boomers enter retirement and their adult children leave the nest (well… eventually), we can expect many of them to downsize. That could add further pressure to the market for smaller, two-bedroom condos and townhouses.

Home builders have yet to catch up: A full 90% of new single family homes had three or more bedrooms in 2016.

It’s not clear that home builders are making any adjustments, though. A full 90% of new single family homes had three or more bedrooms in 2016. And while most multi-family units built were two-bedroom apartments or smaller, they still comprise a much smaller portion of the market: There were more four-bedroom (or larger) houses built last year than apartments of all sizes combined.

Meanwhile, as millennials wait longer to buy their first homes, the homeownership rate has slid steadily from its peak in the mid-2000s. It fell to 50-year low in 2016 — to 62.9% — before ticking up slightly, to 63.7%, in the second quarter of 2017. There are several reasons for the drop in homeownership, beyond mere demographic trends: Tight credit conditions, higher home prices, low inventory, and the aforementioned albatross of student loan debt all play a role (as does “post-foreclosure stress disorder” — residual anxiety from the housing crisis).

In 2004, 69.2% of American households owned their home — and one could easily argue that was too high. But, Yun says, fewer homeowners means that the enormous wealth created by rising home values since the market bottom has been concentrated in the bank accounts of fewer Americans.

“There are fewer homeowners today compared to a decade ago, while renter households have risen by 8 million. So it is still the case that the massive $7 trillion in housing wealth gains from the cyclical low point has been accumulated by a fewer number of families in America,” Yun told Realtor Magazine in July. “Further advances in homeownership are required to strengthen and broaden the middle class.”

Building a lot more affordable, smaller homes might be a good place to start.