Housing market crisis is making boomers richer and millennials poorer

SANDY — Lara Gale remembers the excitement she felt as a 12-year-old when her parents first bought their 4,600-square-foot home in the foothills of the Wasatch Front suburb of Sandy.

The Mediterranean-style house — with its unique arched doorways and windows — was a big upgrade from their first home, which had only two bedrooms and an unfinished basement. The new one had six bedrooms, more than enough for Gale, her three siblings and her parents. It had a large, maze-like basement and a sprawling backyard with a spectacular view of Lone Peak.

"It was like a castle," Gale recalled her 12-year-old self thinking.

Fast forward 29 years. Gale is now 41 years old, and when she visits the home where her parents still live, she appreciates its size and space even more — especially now as an adult who navigated the housing market frenzy in 2021, a year of record-high prices and ruthless competition.

Her story reflects the struggle of millennials, those born in the 1980s or later, who have aged into the housing market at the worst possible time, as Fortune put it. They now make up 43% of home buyers, the most of any generation, according to the National Association of Realtors, while home prices continue on a startling trajectory, rising exponentially faster than American incomes.

Skyrocketing home prices have generated "extraordinary" wealth for homeowners — to the tune of $6 trillion in equity in just the past two years amid the COVID-19 rush on housing, the New York Times reported in May. But it's also widened the generational wealth gap, with home equity wealth disproportionately held by older generations.

The baby boomers and Gen X have navigated their fair share of struggles, like the "double dip" recession in the '80s and stagflation in the '70s. But millennials are facing tough challenges of their own. Of those who went to college, many are saddled with student debt. The older millennial entered a job market hurting from the Great Recession. Those who didn't get college degrees struggled to find blue-collar jobs that past generations used to gain middle-class wealth.

Overall, the average millennial has experienced slower economic growth since entering the workforce than any other generation in U.S. history, the Washington Post reported in a story labeling millennials "the unluckiest generation in U.S. history."

And now, as the price of housing shoots higher and higher into the clouds with no clear end in sight, millennials — and yes, Gen Z — are finding it nearly impossible to afford a home. Especially a home like the one their parents bought years prior.

The generational divide

Back in 1993, Maureen and Blaine Gale traded their first home for about $75,000 and bought their new Sandy home for about $143,000. Granted, interest rates in the '90s were sky high — Maureen Gale said their original purchase rate was around 12% — but down the road they were able to refinance for a better rate while using home equity for expensive projects like a new roof.

Today? That home could probably sell for about $850,000, according to a Zillow estimate — if not even more for its desirable proximity to Little Cottonwood Canyon.

Contrast that with the home Lara Gale bought for about $395,000 further north, in Ogden. It's about 2,300 square feet. Upstairs it has two bedrooms and one bathroom. She rents out the basement to tenants to help her pay off about $15,000 in renovations and the roughly $2,000 per month mortgage.

The summer of 2021, when Lara Gale got serious about buying, she'd already seen plenty of homes, several of which she'd put in offers for, but to no avail. She quickly learned she'd need to lower her expectations for a home within her budget, and because in order to put in a winning offer she'd need to cough up well over asking price.

"It was really discouraging," she said.

The home that would eventually be hers? She offered to buy it without actually seeing it in person first. The online photos were enough to tell her it was an "incredible opportunity" she'd miss out on if she didn't act fast. She put in the offer the day after Christmas and got the news the next day that the sellers, who were motivated to unload fast, accepted.

No, the Ogden home is hardly comparable to her parents' Sandy property. But it's hers. Lara Gale said she feels like she's finally "living my dream for the first time in my life," with a space of her own near local trails where she and her dog, Harvey, can hike together.

Lara Gale was done renting and living with roommates. As a single woman, she said she didn't want to wait around to possibly meet someone and get married before buying. She'd decided to get her master's degree in applied economics from Utah State University "to increase my independent earning potential, frankly, because I just got tired of waiting to find a partner."

Today's housing prices certainly make the prospect of buying as a single person daunting, Lara Gale said. "It's difficult to impossible." But she did it.

However, not without help.

Lara Gale's mom lent her $15,000 to help her pay down her car loan so her debt-to-income ratio was low enough to qualify for the mortgage loan. And as a veteran, Lara Gale qualified for a VA loan, which didn't require a down payment.

Had she needed a down payment, she said that would have put buying "just out of reach."

"I would have never been able to get there."

The housing market's vast impact on wealth

It's simple. If you own a home, you're likely far better off. Especially in today's market.

Over the past two years, Americans who own their homes gained more than $6 trillion in housing wealth, the New York Times reported in May using estimates from the Federal Reserve.

Now, realize these gains aren't because these homeowners made $6 trillion in renovations or upgrades — it's based on the sheer rate that home values grew amid the pandemic housing frenzy.

Most of this money "has been created by the simple fact that housing, in short supply and high demand across America, has appreciated at record pace during the pandemic," the Times reported.

"It's a remarkably positive story for Americans who own a home; it's also inseparable from the housing affordability crisis for those who don't," the Times reported. "For them, rents are rapidly rising. Inflation is whittling away their incomes. And the very thing that has created all this wealth has pushed homeownership as a means of wealth-building further out of reach."

Gray Kimbrough, an economist at American University who specializes in research on labor and housing, has also done extensive research on millennials and how they've been faring compared to past generations.

Kimbrough's research shows millennials have been lagging far behind in household wealth — and especially housing wealth. At an age when baby boomers and Gen Xers were building home equity, millennials held close to zero housing net worth in 2019, according to an analysis Kimbrough tweeted in May of 2020.

According to another analysis Kimbrough posted in March of last year, baby boomers held a much higher portion of U.S. household debt than Gen Xers did at similar ages. Meanwhile, millennials continued to hold an "even lower percentage of wealth at each age."

"Boomers still hold more than half of U.S. household wealth," Kimbrough tweeted.

As for during the pandemic? His research shows baby boomers and Gen Xers actually gained far more in housing wealth (net of mortgage debt) than millennials did altogether.

A millennial himself (on the older end of the spectrum, born in 1981) based in Washington D.C., Kimbrough has his own experience with the housing market and how it's impacted his wealth. He considers himself "very lucky."

Kimbrough said he bought his home a decade ago, in 2012, for about $360,000. Years later, he would realize real financial benefits from that purchase when he sold that home last year for $780,000 to upgrade to a new, larger townhouse in the $800,000 range.

"I (was) able to transfer a lot of that wealth from the ridiculous home prices as much as it had appreciated over the past decade," he said. "But I would not have been able to buy my current house if I had not already owned one."

While owning a home does put Americans at a big advantage, it's not the only challenge millennials are facing. A big part of that millennial struggle, he said, is how they've experienced lower rates of economic growth in their early adult years relative to all older cohorts.

"That is really one of the biggest forces we've encountered," he said. "When we entered the job market ... we've all had to face these headwinds in our early adult years that previous generations didn't."

Yes, older generations have experienced recessions and difficult economic times, Kimbrough said, "but this persistently lower levels of economic growth is something that's new. ... It has lifelong effects on your trajectory in the labor market, and then obviously that's going to affect your ability to buy a house."

Over the past several decades, Kimbrough said "we've definitely seen" a decline in homeownership rates for people in their 20s, 30s and even 40s relative to previous decades.

"So we are much less likely to own a house in our 20s or 30s," he said. "That means that when house prices go up like this, we don't benefit the same way that homeowners do, and we also have even more trouble getting a house now that we don't have all of that wealth to pull on."

The rent trap

Meanwhile, that wealth-building "American dream" of homeownership is becoming increasingly out of reach as high prices are locking young would-be buyers out and trapping them in expensive rentals.

While rents aren't increasing at quite the same pace as home prices, they're still climbing. Those priced-out renters also miss out on investing in an asset and building their wealth while left vulnerable to yearly price hikes.

Consider:

• The median homeowner net worth was $255,000 in 2019, while renter net worth was $6,300, according to the 2019 Survey of Consumer Finances, which showed housing was a major source of wealth for homeowners.
• Across all income groups throughout the U.S., "housing wealth accounted for 32% of the wealth created between 2016 and 2019, the largest of any category," housing researchers James Wood and Dejan Eskic wrote in the State of the State's Housing Market report, published in October, citing the 2019 Survey of Consumer Finances.
• In Utah, home equity wealth accounted for 71% of the state's total wealth, according to Eskic's analysis of 2019 census data.
• Utah is among the six Western states that have seen the highest homeowner equity gains in the past year. The average Utah homeowner gained $92,000 in equity over the past year as of the first quarter of 2022, according to a CoreLogic report published June 9.

It's important to note a recession could certainly wipe out some of this home equity wealth, as it's not the same as having it in cash or in a bank account. In order to realize this wealth, Americans would have to of course sell or cash it out through a home-equity loan.

However, evidence shows homeowners can use their home equity in beneficial ways — maybe to send their kids to college, to start a business, to invest in more housing or other ways to build even more wealth.

So home ownership plays a large part in intergenerational wealth, and today's vast equity gains will likely enable home-owning families to capitalize. But it's terrible news for families who don't own.

"This period of rising equity will enable some families to create intergenerational wealth for the first time. It will force other families to delay homeownership for years," the Times reported, while widening inequality "as gains go disproportionately to baby boomers (at the expense of millennials who will one day buy their homes)."

You also can't talk about generational wealth without also acknowledging there are deep racial divides. White households have a "homeownership rate that is 30 percentage points higher than that of Black households," the Times reported.

"The vast majority of that boomer wealth is white boomer wealth," Kimbrough said. "The ability to pass that onto their children and to help their children buy a house is something many more white parents are able to do for their kids because of all the systemic inequality and the way we set up housing markets in the '60s, '70s and '80s that barred a lot of people from entry at that time."

For those who look at these charts and simply think all of this wealth will eventually shift to younger generations once their baby boomer or Gen X parents die, Kimbrough notes it takes a long time for that wealth to eventually transfer — especially as life expectancy expands in today's modern age.

"Yes, it is true that some of this — and perhaps much of this wealth — will pass eventually, but it's not true that it's going to happen when they're still young enough to take advantage of that to buy a home when they're having kids," Kimbrough said.

"And when you're expecting that generational wealth to transfer on, again, you're perpetuating the inequalities of who had the wealth to begin with and whose kids will then end up with the wealth."

A (nearly) impossible dream

Lara Gale feels utterly fortunate that the stars aligned for her to buy a home soon after graduating with her master's degree. She now works for the Bear River Association of Governments in economic development, but it was thanks to a six-month stint in a full-time position at Utah State University that she was able to qualify for the mortgage.

Her qualification felt "cobbled together," she said. It wasn't a breeze. It was stressful and frustrating. And the experience left her worried for other young Americans.

"They have less and less grace. If they make a wrong move in their career choices — or not even a wrong move. If they make a move in their career choice that doesn't lead to very quick upward progression in a career to increase their wealth at a really quick pace, they're going to fall behind really fast."

Lara Gale notes she wasn't perfect. She took her time in her adult life to figure out her path. She said she took her fair share of "missteps" and "mistakes" — but it's ultimately what led her to her life today. And she worries millennials and Gen Z have less wiggle room to figure out their lives without big financial consequences.

"I feel like you should be able to live your life and not be destroyed financially because you don't make perfect moves every time," she said. And yet to obtain ownership in something as basic as housing — free from the whims of landlords — is becoming increasingly difficult, even though it's a crucial part of what's known as the "American dream."

"There's no blame by any means," Lara Gale said, noting past generations have had to navigate hard economic times as well as institutional cultural shifts, among those women's rights.

And she never considered her parents wealthy — they were "super middle class," she said. They worked hard to provide for their family. Money was tight at times. To afford the new home, Maureen Gale said she started working full time.

When she thinks about the challenges she and her husband faced compared to today, Maureen Gale said today's environment feels more "discouraging." Back then, "everything was possible, still."

"I mean, I think it's possible, right?" Lara Gale chimed in. "But it's going to take everything you've got, doing everything right, not making any mistakes. Not having any foreseeable situations affect the trajectory of any given decision."

Lara Gale said if she hadn't started "fixing my trajectory, right when I did, I would have never been able to buy that house."

Now Maureen and Blaine Gale also have their own dilemma. They're empty nesters. They no longer need a large, six-bedroom home. And as they've gotten older, Maureen Gale said they struggle to maintain such a large house or even navigate its four levels of stairs. It's hard on their knees.

They've thought about selling, Maureen Gale said, but they're reluctant to leave the neighborhood they love. And buying a different home in today's market would come with its own high price tag, even if they were to downsize.

So while they've got all this "wealth" tied up in their home — its real value is keeping a safe, stable roof over their head.

"What it reveals, I think, is the nature of wealth in America and this danger of housing being sort of a sink for wealth," Lara Gale said. "You can't have financial stability tied up in an asset that is necessary for survival. And yet that is the case."

As everyday Americans compete with each other — and investors — for housing that simply isn't available, "you've got this bizarre lottery situation," Lara Gale said, "with an asset that is treated as though it's some kind of commodity when in fact it's as necessary as water."

It's a comment that truly stabs right at the heart of the issue with American wealth.

A fundamental flaw

Because most Americans — especially middle-class Americans — hold so much of their wealth in their homes, they have an obvious incentive to protect that investment against any threat. There's also less of a systematic incentive to increase housing supply — because so long as supply is tight, values (therefore their investments) continue to go up.

While baby boomers continue to hold a majority of the nation's wealth, they often "use that as power to entrench the wealth that they have," Kimbrough said.

Thus, the NIMBY (not-in-my-back-yard attitude) is born. They worry higher density living will drop their property values (a claim that's not supported by evidence here in Utah, according to University of Utah housing researchers). Meanwhile their children and grandchildren continue to struggle to find a place to live.

"That lack of housing supply has really hit hard the younger generations that are less likely to already own a house," Kimbrough said. And yet, the NIMBY attitude is motivated by this belief "that they need to do this to protect their wealth."

Benjamin Keys, a professor at the Wharton School of Business, told the New York Times he worries that all this new housing wealth will only reinforce problematic aspects of the American housing market: Housing acts as both shelter and a financial asset, and homeowners, feeling like they have few alternatives to build wealth, will fight to protect that asset, in many cases through NIMBYism.

"There's actually something that's kind of pernicious about this," Keys told the Times, as millions of people have made trillions of dollars the last two years by doing nothing.

"But it's worse than that," he continued. "It's not that they're not doing anything; it's that they've aggressively blocked development in so many places."

It's also important to note that there has been a "growing deficit" in not just housing in general — but specific housing types that would be more affordable for younger, first-time homebuyers, according to a Freddie Mac report published in May of 2021.

"One of the most important reasons for this shortfall has been the severe underbuilding of entry-level homes, where most of the demand exists, especially now given the large cohort of Millennials entering the housing market," the Freddie Mac report states.

The "main driver" of the housing shortfall has been "the long-term decline in the construction of single-family homes. That decline has been exacerbated by an even larger decrease in the supply of entry-level, single-family homes, or starter homes," the report states.

Between 1976 and 1979, about 418,000 entry-level, single-family homes were being built per year, making up about 34% of all new homes. But since then, as mortgage rates and demand have fluctuated amid economic conditions, that share of entry-level homes in overall construction has dropped only 7% as of 2019, according to the Freddie Mac report.

Today, here in Utah, as interest rates and home prices continue to squeeze would-be home buyers, about 70% of Utah's households have been priced out of the median-priced home.

Related topics