Millennials are now the 'roommate generation' after being squeezed out of homeownership by high housing costs, said Redfin CEO

• Redfin CEO Glenn Kelman warns that millennials could become the "roommate generation" due to high housing costs.
• His comments come as consumer homebuying sentiment continues to lag in 2023.

Millennials could become the so-called "roommate generation" as would-be homebuyers continue renting or living with parents to avoid paying exorbitant housing costs, Redfin CEO Glenn Kelman told the Barron's Live podcast on January 4.

"We have a whole group of Americans who can't afford homes, and that's happening right as Millennials are coming of homebuying age," Kelman said.

Kelman's comments come at a time when homebuying sentiment in the US is at a near all-time low. According to Fannie Mae, the agency's Home Purchase Sentiment Index — which measures consumer expectation for six homebuying factors such as employment and mortgage rate outlook — remains just slightly above the all-time low that was set in October.

"The only solution is for prices to fall," Kelman said, adding that the Fed is also paying close attention to home prices and affordability as an indicator of inflation. "We could see that as a calamity — I know that it affects homeowners, and I am one of them — but at the same time, we have to make room for the next generation to be able to buy a home."

Kelman predicted that home prices would decline by about 10% in 2023 as high mortgage rates continue to put homes out of reach for many.

Another reason that Kelman pointed out regarding the trend is that rent increases continue to outpace wage growth, even as the US rental vacancy rate increased. This makes it harder for millennials to save up enough money for a downpayment on a home.

Kelman cited data from the Federal Reserve Bank of St. Louis which shows that the US rental vacancy rate jumped from 5.6% in Q2 to 6% in Q3, putting it slightly above the rates that were measured in the third quarter of 2021. In turn, this caused the median US rent to moderate slightly to $1,634 in Q3, but that figure is still 5.8% above where it was in Q3 2021, according to Apartments.com.

Increasing rents and home prices are also two reasons why US household growth has declined significantly over the past 18 months, Kelman said, citing figures from the Census Bureau. In turn, prospective homebuyers are choosing to live with their parents or rent with roommates until the market begins to shift back in their favor, Kelman added.

"To have that happen at that point of the year just shows how much inventory was created in the rental market over the last 18 months and what that is doing to rents," Kelman said.

Millennials who plan to make the leap towards homeownership could still find reprieve in the Midwest or overheated cities like Boise, Idaho or Salt Lake City, Utah. Kelman added that midwestern markets have remained far more stable compared to places in the Sun Belt, where home prices have been falling precipitously.

Other analysts, such as Orphe Divounguy, a senior economist at Zillow, told Insider in early December 2022 that the Midwest's relative affordability compared to coastal markets makes it an attractive destination for remote workers.

Cities such as Chicago or Columbus, Ohio could see a lot of renters become homeowners as well, Divounguy added. One reason is that homes in these markets are typically selling for under their list price. For example, Chicago's median home price is just over $312,000, which is about $45,000 less than the US median home price, according to Zillow. Meanwhile, 59% of homes in Chicago are selling for under their asking price as of October 2022 compared to 45.5% of homes selling for under ask across the US.