Millennial homeowners fear loss if they sell to upgrade

When do millennials truly “grow up”? Considering the rising trend of millennials living with their parents, with as many as 35% of men ages 18-34 under mom and dad’s roof, one could argue it is when they buy their first home. But ask most millennial starter-home owners, some of whom may still have mismatched dishes from college roommates in their kitchen, they may tell you they truly feel mature when they upgrade to their “forever home”, where they will stay for a while, in a good school district, where it is their turn to tackle parenting and raise their own family.

At least that’s how it used to work. With rising home prices and mortgage rates, millennial homeowners are staying longer in their starter homes, many against their wishes to upgrade. According to the latest ValueInsured Modern Homebuyer Survey conducted in Q3 2018, 85% of all millennial starter-home owners wish to sell and upgrade to another home, but 78% are hesitant and have not made the move as they worry they could be buying high.

This creates a housing bottleneck, severely limiting supply of more affordable starter homes historically made available when a generation of first-time homeowners upgrade and make room for the next generation. This bottleneck is a key catalyst of today’s housing affordability crisis.

To continue to grow the housing market and welcome the next wave of starter-home buyers, we need their predecessors to move up. But the latter aren’t, or they can’t. Traditionally, American families rely heavily on real estate gains to build their household wealth. You sell your starter home, pay back the bank, get your initial down payment back plus a handsome chunk more, and you put that larger sum of money toward your next upgraded, more valuable home, so on and so forth. At least 1 in 5 millennial starter-home owners now report, no, they can’t.  

In the Q3 survey, among millennials who say they wish to sell and upgrade:

  • 38% say they can’t afford to do so due to today’s high home prices

  • 23% say they fear they can’t afford a new mortgage at today’s higher rates

  • 15% believe they likely won’t net a profit after paying realtors’ commissions, closing costs, taxes and moving costs associated with selling and upgrading

  • 21% are more pessimistic, and fear they would lose money or owe their lender money after selling, so they need to stay put even when they are ready to move on and up

It has been widely reported that as Americans stay longer in homes they have outgrown, home improvement giants such as The Home Depot and Lowe's reap impressive gains. The short-term fix could prove to be a risky trend for the broader housing economy, as some homeowners take out loans to renovate, hence owing more on a home they wish to sell, while further clogging up the aforementioned inventory bottleneck that gets little relief.