Millennials have become their own worst enemy in the housing market

• Many young Americans want to buy their first home at a time when the supply is low.
• The housing demand from millennials has made it harder for the generation to get into the game.

One thing keeping home demand — and prices — up is that there are a lot of millennials trying to buy.

In 2020, millennials overtook baby boomers as the largest generation. That group, roughly aged from the mid-20s to early 40s, is also entering their prime home-buying years, with the average age of first-time home buyers at 36.

The average millennial has also seen their net worth double in the last five years, from about $54,000 to $115,000, according to The Federal Reserve.

The demand for homes from millennials has been enough to keep the pressure on the housing market in recent years, according to a new research publication from the Indiana Business Research Center and the IU Center for Real Estate Studies.

Simply put, there are a lot of young Americans looking to buy their first home at a time when the housing supply is still low.

While mortgage interest rates have started to fall in recent weeks, they were above 7% for much of 2023, peaking near 8% in October. Meanwhile, housing prices are still high but have started to pull back recently in some areas of the country. In September, Zillow reported that the total US housing market reached a record value of $52 trillion, a 49% jump since before the pandemic.

As a result, the overall housing demand from younger Americans has made it harder for other millennials to get into the game.

Millennials have had a more difficult path to home ownership

Millennials have been hit hard financially, with more debt and a lower net worth than their parents had at the same life stage.

Growing that wealth has been made more difficult due to the drop in housing supply over the last 15 years, which has pushed prices up and made it that much harder to get into the market. Housing supply has remained low in the last two years as many older Americans have chosen to stay put in their mortgage-free homes or with mortgages locked in at lower interest rates.

To make matters worse, millennials carry a heavier load of student loans with payments that resumed in October.

According to the Education Data Initiative, 33% of all student loan accounts belong to millennials, and they hold 30% of the total debt. In both categories, that is second only to Gen Xers.

The result is that it takes the average millennial longer to buy their first home. In 2021, the average age of a first-time homebuyer was 33, according to the National Association of Realtors. In 2022, that age grew to 36.

Millennials are in danger of creating a housing bubble

The research from Indiana University warns that the larger millennial population could lead to a housing bubble and a crash in the housing market.

Demand from this generation is expected to wane just as baby boomers start to leave the housing market. Meanwhile, post-millennial generations will be smaller due to lower birth rates. As these cohorts enter their prime house-buying years, this could lead to a surplus of homes on the market, pushing prices down.

"A generational housing bubble is on the horizon," researchers wrote. "New housing built now to meet strong demand may sit vacant in a decade. Demand reversal will intensify by the mid-2030s when the annual number of homes that seniors add back to the market is expected to be 40% higher than current levels."

So, do millennials stretch themselves financially to buy into an expensive market now, hoping to build wealth that might later disappear? Or do they keep chugging along in their current state without a major asset, which is typically the easiest path to a higher net worth?

It is starting to feel like a no-win situation.