How Millennials (and the rest of us) Can Win
By Pat Kilner
You may have heard that Warren Buffet is investing in homebuilders. Despite high mortgage rates, low affordability of homes, and rising costs of building materials, the billionaire sees something worth betting on in housing.
As the stakes get higher for families in the market, there are two types of buyers. A growing number are folding their hand in hopes of buying in a less “crazy” market. But there is a contingent who see what Mr. Buffet sees and are taking action.
Every generation faces its own problems, and in every generation, families have grappled with the affordability of housing and the availability of land, enticed by the prospect of stability and wealth generated from home ownership.
The United States has been historically blessed with abundant land, institutional stability, and a steadily growing economy over time. These have been the backbone of the American Dream. But the Millennial generation faces a new type of challenge that has crept up seemingly out of nowhere, confronting them with a wildly complex real estate Rubik’s cube.
At the beginning of this year, an estimated 28 million Americans had plans to buy a home. But the odds are stacked against all of them getting what they want. In 2022, only 6.1 million Americans were able to purchase a home. That’s a 22 million person problem, and its growing.
When I describe this to friends, they look at me with exasperation and ask, “How did we get into this mess? How will my kids ever be able to buy a home? What does this mean for the prices of starter homes?” This feeling of helplessness is entirely understandable, but they’ll miss out if they don’t move past these sentiments.
On the other end of the emotional spectrum, when I speak with entrepreneurs about this same set of difficulties, they respond with incredible optimism. This small subset of the population reacts to business quandaries like firefighters react to smoke. They know that when things are difficult, there’s opportunity. A similar sense of adventure and optimism around opportunity—despite the challenges—has been America’s calling card since its inception.
Both the optimist and the pessimist grapple with the same reality. It’s their perspective that largely determines their path forward. So let’s begin there.
Two factors compounding for 15 years have created our 22 million households problem. (For perspective, twenty-two million is about the number of households in California and Texas combined.)
Factor 1: Unprecedented Demand
The millennial generation, the largest since the Baby Boomers and which came of age right as the Great Recession of 2008 hit, delayed starting families and doing what economists call “forming households.”
The impact of those years lingered for about a decade. But around 2017, millennials all at once began putting down roots. They now account for over 45 percent of the buyers in the marketplace. But they weren’t idle during the intervening years—they’ve shown up to the party with greater personal savings and income than their predecessors and more family wealth transferred from their Boomer parents.
In markets like the ones we serve in Fairfax, London, Montgomery, and Frederick counties, as well as Washington D.C., we are witnessing over 20 percent of buyers paying all cash for their homes. This access to liquid capital makes millennials far less fazed by historically high interest rates than prior generations.
Factor 2: The Supply Decline
The impact of the Great Recession on the home-buying tendencies of millennials didn’t just end with them. Between 2007 and 2012, around 50 percent of U.S. home builders went out of business, kicking off an era of far fewer housing starts. But large-scale construction is not a spigot you can easily turn back on after shutting it off. Even after 15 years and incredibly low mortgage rates, we’re not bringing new homes to market at the same velocity as we were prior to 2007.
It doesn’t take much to imagine how the lack of availability compounds demand when you factor in the added competition for homes from corporate buyers, iBuyers, and foreign investors—all of whom see the opportunity to scoop up limited housing supply in a country where wages are strong and demand for housing is driving both prices and rental rates for the foreseeable future.
Do interest rates play a role? Of course. But they don’t have nearly the same impact as the larger demographic realities at play.
For instance, in the spring of 2022, when you could get a mortgage at 3 percent, buyers had more buying power than they currently do at 7 percent rates. That 4 percent difference changes an $800,000 mortgage by around $2000 monthly. But has that dampened demand? Not at all. With even less supply on the market and buyers with strong income and savings, we are still seeing bidding wars and escalating prices. Even in today’s environment a lot of people still see buying a home as a smart investment.
Here’s another way to think about it. Assume I told you that I had a company that produced an essential product everyone desperately needed. I was also limited in the number of units of the product I could ship, but luckily despite the demand it would take the competition 15 years to catch up. That means that for every product I made, I would have ten buyers lined up to bid for it for at least the next 20 years.
How excited would you be to make this investment?
And I haven’t even mentioned the best part. Let’s assume you knew of friends who had already put money into the company. Their initial investment has grown monthly and shows no sign of stopping. You’d be eager to buy into such a company. As long as you saw the long-term upside, it wouldn’t matter that your friend’s shares from a year ago may have cost less.
In fact, given how clear the future growth is, you might even take out debt to buy some shares, especially if that’s what you saw others doing. And if you knew that in the relatively near future, you could pay a little bit and reduce the cost of your debt without affecting the value of your investment, you’d be even more eager to buy today.
This is the logic of Warren Buffet and the winners in today’s housing market. To them the landscape is clear: Rents are only rising but rates will not be this high forever. Equity is building for those with stock in properties and real estate remains a phenomenal hedge against inflation.
But Buffet can’t corner the market on that logic. It’s all right there for you to capitalize on just like him.
