A new look at the financial health of the Millennial generation shows they are far behind their predecessors. The Wall Street Journal combined data from the Census Bureau and other sources to come up with a snapshot of a generation with “less wealth, less property, lower marriage rates, and fewer children.” That data has negative implications for them, the housing market, and for public programs like Social Security that depend on the income potential of younger workers. (1)
The Wall Street Journal’s assessment is called: “Playing Catch-Up in the Game of Life. Millennials Approach Middle Age in Crisis. New data show they’re in worse financial shape than every preceding living generation and may never recover.”
Struggling with Student Debt
Okay. That’s not very encouraging news! They got a slow start on their financial life because of the Great Recession, and many have been struggling with a huge pile of student debt. A decade of economic growth and a thriving job market has helped get some of them back on track, but this new data shows the impact on their career beginnings could make it impossible for them to “catch up.”
The oldest Millennials are 38 years old and are now approaching middle age. Their generation includes babies born between 1981 and 1996. According to the Wall Street Journal, more than 72-million U.S. Millennials are now in their 30s. They are expected to become the largest generation this year, as Baby Boomers dwindle.
Federal Reserve economist, Christopher Kurz, and his colleagues took a look at Millennial financial data including their income, debt, assets, and spending. Compared to Generation X and Baby Boomers, they found that Millennial households had an average net worth of $92,000 in 2016. That’s about 40% less than Gen X households and about 20% less than Boomer households at the same age. The figures were also adjusted for inflation and other variables.
They say wages are also much lower on average. Gen X men in full time jobs earned 18% more. Boomers earned 27% more. Gen X women also earned more — about 12%. The figure was 24% for Boomer women.
A Stroke of Bad Luck
Some economists say the biggest reason for this wage gap is bad luck, because Millennials entered the workforce during a recession. They say a slow start to your career can haunt you for life. UCLA economics professor, Till von Wachter, says that Americans who started working at the time of the 2007 to 2009 recession found themselves in the midst of a 5% surge in unemployment, and a 10% drop in pay over the next ten years.
Wachter participated in a study that looked at four decades of data on earnings. It shows the marriage rate, birth rate, and the rate of homeownership are all much lower.
The Wall Street Journal reports that Millennials have helped push the U.S. birth rate to its lowest level in 32 years. It’s currently around 1.8 babies per woman. That’s well below the ideal birth rate of 2.1 for developed countries. It’s also bad for Social Security. The low birthrate will result in fewer workers down the road and an estimated deficit of nearly $2 trillion over the next 75 years, according to the Journal.
Homeownership Out of Reach
But even before they think about having kids, they consider the purchase of a home which has been out of reach for many Millennials. That’s despite ten years of economic growth and a strong job market. 32-year-old Joy Brown told the Journal, “If I can’t afford a home, I definitely can’t afford kids.” She blames her student loan debt of more than $100,000. But she’s just one of the many Millennials in the same situation.
Millennials are better educated than other generations, but the price of that education has held them back. Paying for those college degrees is taking precedence over big ticket commitments, like a mortgage, marriage, and children.
The numbers show that about a third of the Millennial population owned homes in 2016. At the same age, about half of Gen X’ers owned homes and a little less than half of Boomers.
Socialism vs. Capitalism
The financial difficulty that Millennials are experiencing is also affecting their political views. A Gallup poll last summer shows that Millennials are leaning more toward socialism than capitalism. The margin was slim, but Millennials are the only generation to show a stronger bias for socialism. The survey didn’t include Generation Z because most of them haven’t reached voting age yet.
This shift in political views has resulted in stronger support for populist candidates, and could have an impact on the upcoming presidential election. If Millennials get out the vote, chances are they will choose candidates that support universal health care and, you guessed it, a free college education — especially those trying to pay off those student loans.
Getting Help from Employers
Some are aware that this financial delay is making it difficult to save enough for retirement. The Wall Street Journal says many are pushing employers for access to financial planning. Ford Motor Company is one employer that has responded. All 80,000 Ford employees can get one-on-one investment reviews many of whom are Millennials, in their 30’s and just learning how to plan and save.
Real estate company Zillow is also helping Millennials with a student loan repayment program. Of course, Zillow knows the importance of homeownership. That’s the way many people create lifetime wealth — with equity in their homes.
And while there are many low down payment programs available for first time buyers — as low as 3% down payments — many Millennials can’t qualify for a home loan because of their high debt-to-income ratios.
The amount of student loan debt today is three times what it was a decade ago, and the amount that each individual owes is twice what it was a decade ago.
According to Brookings, an old rule of thumb for how much you should pay for college was not to borrow more for a bachelors degree than what you’d expect to earn after one year of employment. Today that ratio is closer to 5 years.
In the 80’s, about 5% of one’s income was needed to make student loan payments. Today, it’s more like 10 to 20% of one’s income — which throws off debt-to-income ratios and virtually eliminates the ability to qualify for a mortgage.
It takes about 21 years to pay off student loan debt today on average. That means that a 21-year-old college graduate may still be paying off their student loan by age 40. And since there are 44-million student loan borrowers today, it’s safe to assume this group of young people could be renting for much longer than previous generations.
What does this mean for the real estate industry?
There are an estimated 83-million Millennials, and the youngest are 23-years old today. We could see two decades of strong rental demand.
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