Ben and Kellen Goldsmith, both in their late 20s, feel lucky to have bought their first home last month for $620,000 amid one of the tightest housing markets in at least a decade.
The new, three-story town home in Seattle’s Eastlake neighborhood offered the newlyweds the amenities they wanted, like an open floor plan, sunset views of Lake Union and proximity to nightlife. The Goldsmiths quit renting and moved into their new home right before Thanksgiving.
Now, “our budget has gotten thinner,” said Ben Goldsmith, a 28-year-old software engineer. “It makes it hard when we want to go and hang out with our friends.”
The trillion-dollar question facing the housing market in 2015 is how many young people in their 20s and early 30s will make that leap to ownership. These so-called millennials haven’t been buying homes at the same rate as previous cohorts of young people.
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If a sizable share of them do jump into the market, as some expect, it will put further pressure on the inventory of for-sale homes, which is already at 10-year lows in King County.
Members of this generation, which came of age as the housing bubble burst and the nation tumbled into the Great Recession, tend to have lower incomes and lower credit scores than the Generation X who came before them.
They’ve flocked to cities like Seattle, only to face skyrocketing rents that make it more difficult to save for a down payment.
As first-time buyers, they’ve had to compete with cash buyers from Wall Street for the least-expensive entry-level homes. Obtaining a mortgage was much more difficult, even with a work history.
But 2015 is shaping up to be a turning point for the housing market and for millennials who want to participate in it, economists and real-estate agents say.
Nationwide, mortgage-financing giant Freddie Mac expects sales of new and existing homes in 2015 to grow 4 percent over the year, reaching their highest level since 2007.
Stan Humphries, chief economist at Seattle-based real-estate website Zillow, predicts millennials in 2015 will overtake Generation X as the largest group of homebuyers. He says if marriage or having kids doesn’t push them into homeownership, soaring rents will.
Real-estate agents are gearing up for it.
“This is going to be the year they start buying homes,” said OB Jacobi, president of Windermere Real Estate, the region’s largest residential real-estate brokerage.
Millennials — the cohort born after 1980, and so named because they are the first generation to come of age in the new millennium — are the country’s largest generation, representing about one-third of the population.
They are less likely to be homeowners than young adults in previous generations, according to a recent report from the president’s Council of Economic Advisers.
The reasons for the decline are varied: The Great Recession made it difficult, if not impossible, for fresh college graduates to find jobs. Many of the new jobs are in expensive cities, particularly on both coasts. Borrowers with less than stellar credit — the vast majority of those under age 30 — couldn’t get mortgages after the 2008 financial crash.
Young people coming out of college are also carrying more student-loan debt than previous generations.
Uncertain job prospects, combined with higher levels of education and changing cultural norms, also meant that many younger people have delayed marriage.
In pricey markets like Seattle, young renters aren’t very confident that they’ll eventually be able to own a home, according to a Zillow study released in September.
Just 11 percent of owner-occupied homes in King County’s major cities are headed by someone between ages 25 and 34.
Still, census data suggest more people in this age group can afford to own a home: Thirty-five percent of them in King County made more than five times the poverty level in 2013, or more than $60,000 annually.
In November, 76.8 percent of people aged 25 to 34 nationwide were employed, the highest level in six years.
“The millennials probably are the largest demographic moving into town because the jobs are here,” said Keller Williams real-estate broker Kelley Meister.
November’s median monthly rent in King County was $1,750, according to Zillow. Median rent rates have risen 25 percent over the past two years, pushed higher by a flood of new luxury high-rise apartments.
Meanwhile, the mortgage on a home at King County’s median price of $400,000, assuming 20 percent down and a 4 percent interest rate, is about $2,000 a month including taxes and insurance — but that cost is offset by federal tax deductions on mortgage interest and property taxes, as well as the owner’s growing equity.
If there’s a coming army of millennial homebuyers in the Seattle area, the Goldsmiths are in the vanguard.
After getting married last summer, Ben and Kellen Goldsmith’s thoughts turned to another rite of passage — buying a home.
The couple had been able to save for a down payment thanks to their jobs: Ben is a software engineer at Microsoft, a job he’s held for more than six years. Kellen works in marketing for computer-hardware retailer Dell.
They had planned to hold off on buying a home until spring, when the number of listings tends to be at its peak, said Ben Goldsmith.
But after running the numbers, the couple realized a spike in interest rates might harm their ability to afford a home.
“Interest rates were only going to go up next year,” he said. “It didn’t make sense waiting if we didn’t have to.”
After attending open houses in August, they got serious in October.
They saw as many as 25 homes, devoting nights after work and several weekends and learning hard lessons along the way.
“Nothing will have exactly what you want,” Goldsmith said.
They ended up putting an offer in on the very first home they’d seen in August, which had been completed earlier in the year.
By fall, in the absence of takers, the builder had dropped the asking price by $120,000, Goldsmith said.
To come up with a 20 percent down payment on the $620,000 purchase, the couple took out loans against their 401(k) retirement portfolios and tapped their savings. They obtained a traditional mortgage for the rest.
In taking on mortgage debt, Goldsmith said, the couple made a lifestyle and investment choice. Sacrificing frequent barhopping and nightlife excursions for more stable housing costs seemed a good trade-off — but he said some of his friends have a different perspective:
“Do I want to live my life today? Or do I want to not ever see my friends and save all the tiny discretionary spending for a house I may or may not be able to buy in the next 10 years?”
The odds currently do not favor even the most prepared first-time buyers shopping for a home in King County, because the cupboard is nearly empty.
For the first time in more than a decade, King County during the past 12 months never exceeded a two-month supply of homes, according to a Seattle Times analysis of data from the Northwest Multiple Listing Service.
By contrast, Snohomish and Pierce counties have considerably larger supply — measured as the ratio of active listings to pending sales.
A more balanced market, one that favors neither buyers nor sellers, would offer at least a five-month supply.
At the end of 2013, housing experts like Windermere’s Jacobi anticipated a flood of homes would hit the Seattle market in 2014, thanks to soaring prices. But he and others may have underestimated how fearful sellers were of not being able to land their next home.
“We’re historically as low as we’ve ever been,” Jacobi said. “That creates a problem: If you’re a seller and you’re looking to buy, you’re sitting in a house until you find something.”
Another reason inventory has lagged demand: A sizable chunk of homeowners in the three-county area who bought at the 2007 market peak are still underwater — they owe more than their home’s value.
According to a recent Zillow analysis, about one out of every six local homes with a mortgage was underwater in the third quarter of 2014. An additional 18.5 percent of mortgaged homeowners have less than 20 percent equity, making it difficult for them to trade up and less likely to list their home for sale.
The super-tight inventory sparked bidding wars in large swaths of Seattle and Bellevue and helped builders sell new homes at premium prices.
Much of the Eastside, North Seattle and South Seattle saw double-digit gains in median prices in the past 12 months as buyers opted for higher home prices over longer commutes.
But overall the market didn’t repeat the 14 percent median-price jump of 2013. King County’s median price for single-family homes sold in the first 11 months of 2014 was $440,000, 6 percent more than the previous year.
In 2015, Jacobi said, his company expects King County’s median price to gain between 5 and 7 percent, with an average supply of 1.5 months.
The imbalance between demand and supply is so bad that the tri-county market’s stability is “weak and declining,” going in the opposite direction of the nation, according to mortgage giant Freddie Mac’s Multi-Indicator Market Index. The index compares a market’s current activity against historical averages.
Freddie Mac chief economist Frank Nothaft said Seattle metro’s latest index score fell largely because applications for purchase mortgages were down 18 percent over the year and far lower than normal.
The good news, he said, is the tri-county market is still more affordable than it was in the late 1990s, thanks largely to lower interest rates. And it’s even more affordable, real-estate agents say, if buyers are willing to live in less popular neighborhoods or homes that aren’t move-in ready.
Foreigners with cash
Still, plenty of young and first-time buyers have had their dreams crushed by cash buyers, including foreign investors.
“Seattle is becoming more San Francisco-like and is more recession-proof real estate than we’ve ever seen before,” said Tyler McKenzie, president of the Seattle-King County Association of Realtors.
“When we have buyers from around the world who have the liquidity to plunk down several hundred thousand dollars, that will constrain inventory for first-time buyers and drive up prices.”
Almost 40 percent of homes sold in King and Snohomish counties from April to June went for more than list price, thanks in large part to bidding wars.
In April, McKenzie, a John L. Scott broker, had a client interested in a home that had just come on the market in Seattle’s trendy Ballard neighborhood. He and the client decided to skip it after learning the home already had 40 offers.
“We will see that again this (coming) year, I think,” he said, “especially if millennials enter the market.”