Why Millennials Are Shut Out Of The American Dream

Buying a house isn’t as easy as it used to be.
Lite Productions via Getty Images

The kids are not alright. The kids, might, in fact, be screwed.

Millennials are the first generation in the modern era that's overwhelmingly blocked from attaining the classic American dream of homeownership, according to a disturbing new research survey that should be enough end any argument that young adults today are somehow more entitled or spoiled.

Unfortunately, homeownership is still a near necessity for financial success in the United States. So, the question that remains is how and when millennials will find their way out of of this hole.

While nearly all young adults say they want to buy a home, most cannot afford it, according to the survey, from a group of researchers headed by Yilan Xu, a professor of agricultural and consumer economics at the University of Illinois at Urbana-Champaign.

Since the mid-2000s housing boom, homeownership among the young has fallen off a cliff.

The homeownership rate among young people is at record lows.
The homeownership rate among young people is at record lows.
The Huffington Post/Shane Ferro

The research suggests that there are two big reasons millennials who want to buy a home find it hard: student debt and the lingering effects of the Great Recession, the latter of which is apparent in the chart above.

The recession is when everything started going wrong for millennials. First there’s the obvious: The mortgage crisis was caused by loose lending standards -- basically anyone who wanted a house could buy one. In the aftermath of the 2008 carnage, lending standards got much, much tighter. That means higher down payments and a higher barrier to being approved by a bank.

On top of this, exploding student debt loads mean young people have less money to put toward a down payment than previous generations did.

Overall, Americans have $1.32 trillion in student loans outstanding -- already more than twice the amount at the beginning of 2007, which would suggest it's mostly saddled on young millennials -- and that number continues to increase. The debt load not only affects people's ability to take on a big new loan like a mortgage, but also their ability to qualify for a loan, even if they want one.

Between 2003 and 2012, homeownership rates for 30-year-olds who had never had student loan debt fell by 5 percent, according to the paper. For those who had or continued to have student debt, homeownership rates fell by more than 10 percent.

So we currently have a scenario where millennial homebuyers need more money for down payments. But because of student debt, they actually have less.

There is one bright spot in the research: The authors find evidence that these factors will make young people better off if they can manage to get their finances in order.

For once thing, higher down payments mean lower monthly payments. For another, tougher loan requirements may see fewer people default on their loans.

So when millennials finally become homeowners, they will be more financially stable than generations before them, which may make the housing market stronger overall.

But will millennials ever get there?

Because of other effects from the Great Recession, it’s hard for young people to close the gap between where their debt loads are and where their wealth needs to be in order to buy homes.

Wage growth for everyone in America has more or less stalled in the aftermath of the recession, despite a recent return to low unemployment. But just because millennials are finding jobs doesn't mean they are finding good jobs.

"The real worry about millennials is not that they are entitled, but that they are not entitled enough [in the workplace]," columnist Sarah O'Connor wrote recently in the Financial Times about this phenomenon.

A 2014 study from the Federal Reserve Bank of New York found that of the young people who graduated college after 2009 and found work, more than 50 percent landed jobs that didn't require a degree.

After every recession, lots of recent grads end up having a hard time finding work that requires a degree, but the cohort that graduated between 2009 and 2011 were particularly hard-hit. Even if they can move up and find better careers, the financial effects of spending the first few years out of school essentially treading water will follow them for a long time.

So, why is homeownership so important, anyway? Theoretically it's not. Owning a home means piling all of your money into a single, huge, illiquid investment that keeps you from easily moving to find a better job elsewhere, even when that's in your best interest.

A lot of people, like George Mason University professor Alex Tabarrok, think the U.S. should become less dependent on homeownership.

There are so many better investments, Tabarrok wrote in a blog post last week. "Diversification is better and it’s easier to diversify with stocks. Second, unless you are renting the basement, houses don’t pay dividends."

But this isn't theory land. This is America. And in America you are expected to buy a home with a 30-year mortgage when you're young, start building up equity through your working years, then cash in with a nice little nest egg and downsize to a nice little condo in Boca. For decades, the tax code, which allows people to write off the interest they pay on their mortgages, has been favoring those who buy.

It's what America does at this point. Except millennials continue to be shut out.