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Are Millennials Impacting Homebuilding and Construction?

Millennials are a key ingredient to the success of the homebuilding and construction industry. But can this happen without adapting to current employment trends and opportunities?

Economic Situation

The homebuilding and construction industry, a critical sector of the economy, continues to search for strong demand. In Part 1 of our discussion on Millennials, we examined the effects of the slow economic recovery from the recession of 2008 on Millennial purchasing habits: rather than buying or building new homes, Millennials prefer to rent. Due to this trend, a key demand needs to be driven: either Millennials purchase the homes of Baby Boomers to absorb current supply, or build new homes to contribute to household formation. Millennials, the generation born between 1980 and 1993, are the largest generation in American history, even larger than the Baby Boomers.

The ripple effect is interesting, creating a complex feedback loop. Since Millennials are moving out of their parents’ homes and into apartments, the demand for rentals is rising and exceeding the current supply of apartments. But, this generation isn’t the only one dependent on these types of units. Baby Boomers are coming into retirement, searching for smaller quarters to live in. The housing market is now responding to this shift towards more multifamily housing.

In return, fewer workers are being employed to build multifamily units since less manpower is required to build them. This shift also impacts the real estate and retail industries, causing decreased commission for real estate agents and diminishing sales in home improvement stores.  The article, “New Home Building Is Shifting to Apartments,” explains further why housing has such an impact on the economy: “Moody’s Analytics estimates that four jobs are created for every new single-family-home start, versus two for multifamily units. That estimate includes the many indirect jobs created by new construction—renovations, furniture and the like. Multifamily units tend to be smaller so require fewer construction materials and labor along with smaller appliances and fewer furnishings.”¹

In 2013, less than one million residential units were built. Construction workers, a subgroup of the working class, suffered a hit, and so did the economy. Housing and consumer spending are two sizeable drivers of the American economy. US Economics Weekly reported “housing and consumer spending exhibited much weaker growth profiles at the end of recession to present [Feb. 2014] compared to past cycles.”

While most are choosing to rent, housing prices are increasing, along with equity. This is good news for current homeowners. In contrast, rising prices bring affordability into question for those who are entering the market for the first time, particularly the Millennial generation. According to Morgan Stanley research, since 1990 American homeowners have spent around 24% of monthly income on mortgage payments, which remains true for first time buyers; the ratio has gone down to 20% for current homeowners.¹ Another challenge for Millennials is tighter lending standards since their credit isn’t as great as current owners, and neither is their income.²