Millennial Demand For Homes Is Driving A Seller's Market And A Midwest Housing Crunch
Millennials are now the nation’s largest generation, who are aging into home buying just as already slow rates of home building were further slowed by the pandemic.
This year’s spring home shopping season is set to begin with a strong seller's market, with pressures from both limited supply and demand from a new generation of home buyers.
These factors may frustrate Midwestern homebuyers, as bidding wars mean homes will end up selling for more than the listed price. The conditions that have caused a lopsided market have been simmering for some time, and the pandemic has turned up the heat.
“It’s this demographic shift,” Alexandra Lee, an economist with Zillow, said. “This huge generation of millennials is starting to age into their homebuying years.”
Millennials are now the nation's largest generation, and they are aging into home buying just as already slow rates of home building were further slowed by the pandemic.
A review of home listing prices in Nebraska, Iowa and Missouri shows increases during the pandemic and an additional spike during the first two months of 2021.
During the spring and summer of 2020, many would-be sellers took their homes off of the market, deciding to wait out the pandemic, Lee said. At the same time, many Americans found themselves spending much more time at home, nudging some to enter the market for the first time or to look for a new one.
Historically low interest rates are also inducing demand, and the pandemic is causing people to reassess what they value in a home. Some may need more space for home offices and classrooms, or extra rooms for child and elder care.
Michael Maley, a realtor with Berkshire Hathaway in Omaha, has had to tamp down expectations for new homebuyers, as they’re likely to be out-bid.
“Every single house that comes on the market, I think there are fifty-plus buyers that qualify for that house and want to go see it,” Maley said. “Only one person can buy that house.”
A lack of home building during the Great Recession in 2008 and 2009 continues to haunt cities nationwide, keeping the market in favor of those who already own a home.
A housing market in which neither the buyer nor seller has a comparative advantage is when there’s about 4-to-6 months of housing supply available in a given month. A low supply of homes means sellers entertain many more bids, driving up the price. A surplus of homes would eventually lead to prices falling.
Stanley Longhofer, director of the Center for Real Estate at Wichita State University, said low housing stocks are made worse by increases in material and labor costs. The pandemic has shocked the supply chain for most materials, both nationally and abroad.
“We actually saw even stronger demand with even tighter supply,” Longhofer said.
In January, the CRE found monthly home supply in Kansas City dipped below 1, meaning there were just a few weeks of homes available for purchase in that city’s market.
Kansas City has been a seller’s market since 2015, with so few homes on the market that it limited the amount of possible sales. Since then, there has been slow and steady growth in home sales.
“You can’t buy a home if nobody is selling a home,” Longhofer said.
These housing trends are another example of the so-called “K-shaped” recovery, in which people with higher incomes have managed to increase their wealth during the pandemic, but those below a certain threshold haven’t yet recovered their lost income.
“Those households that have weathered this downturn better are households that are more likely to be homebuyers,” Longhofer said. “The households that have been hit more dramatically by the downturn have been households that probably were not in the market to be homebuyers in the first place.”
The cliché “location, location, location” extends to pricing trends.
Steven Shultz, a real estate professor at the University of Nebraska at Omaha, studies price appreciation at a neighborhood level. His previous research found two Omaha neighborhoods — North and South Omaha — had not recovered from the price decreases caused by the 2008 housing crash. Now, as the market is tightening, those two areas have finally caught up.
These areas are the the city’s Black and Latino neighborhoods, and their schools have had historically lower test scores – factors that have kept some buyers from purchasing their first homes in diverse neighborhoods.
“The recommendation for young people when they’re buying a home is to buy in an established neighborhood,” Shultz said. “You’re not going to get a bargain price but if you have to leave in a couple of years, and if the market happens to dive you’re able to resell.”
The rising tide of price appreciation is reaching these neighborhoods, with North Omaha seeing a price increase of 22 percent and South Omaha seeing a price increase of 19 percent — higher than the entire metro which increased by slightly more than 10 percent. For longtime homeowners, this presents a new opportunity to sell their homes for a price much higher than they would have been able to just a few years ago.
Omaha saw the number of listings drop by more than a third during the beginning of the pandemic, just as prices rose by 10 percent.
Shultz cautions against viewing housing trends at a macro level, as sub-markets have their own trends.
“We’re a heterogenous market,” Shultz said.
Economists and realtors believe it will take several years for sellers to lose their advantage, as supply chain issues and a labor shortage will keep homebuilding constrained.
Shultz noted prices will take a while to fall – home prices tend to be “sticky” until conditions drastically change.
This may have a chilling effect – empty nesters may choose to wait to downsize if they’re not confident they’ll find a smaller place where they want to live, Maley said.
Pandemic precautions will continue for the foreseeable future, including more attention to ventilation, cleaning and scheduled open house visits.
“Probably things you should have been doing anyway when you’re letting strangers look through your house,” Maley said.