Real Estate News & Market Insights:
Convinced they will never be able to afford a home, many young people are giving up on saving for a down payment and adopting reckless financial habits instead, according to a concerning new study.
The individual financial consequences and generational economic fallout from growing homeownership despair could be profound, according to the study from economists Seung Hyeong Lee of Northwestern University and Younggeun Yoo of the University of Chicago.
The economists find that renters who give up on buying a home start behaving very differently from those who still hope to become homeowners, with the discouraged group squandering their money, slacking off at work, and gambling on risky investments out of desperation.
“Housing has become increasingly out of reach for younger generations, and many households are now abandoning the goal of homeownership altogether,” the authors write. Our empirical evidence demonstrates that renters who no longer expect to become homeowners behave very differently from those still trying to buy a home.”
It comes as housing affordability remains at multidecade lows, with home prices at record highs and mortgage rates still elevated. Over the past five years, the typical mortgage payment has increased by 82%, while median incomes have grown by just 26%, according to a recent estimate from John Burns Research and Consulting.
The new study suggests that when the prospect of homeownership is out of reach, it changes the way renters think about the future, reducing their incentive to save or work toward long-term financial goals.
The finding turns conventional wisdom on its head: Instead of being unable to afford homes due to their wasteful spending, young people are financially reckless because they have no hope of ever being able to afford a home.
Instead of saving regularly, renters in despair begin splurging on entertainment and small luxuries, perhaps as a consolation for their bleak outlook on life, the study finds.
As well, those discouraged renters increasingly turn to risky investments such as cryptocurrency as a last resort, betting on the slim odds of a windfall return that could change their lives.
“For those priced out of the housing market, gambling on improbable but potentially transformative gains may appear rational, particularly among younger cohorts,” the authors write.
Finally, housing despair also has an impact on work ethic, with those who feel locked out of the real estate market slacking off more and neglecting opportunities to boost their income, the study finds.
“As housing becomes less affordable, individuals who still aspire to homeownership increase their labor effort and exhibit disciplined behavior, while those who lose that hope reduce effort and shift toward less forward-looking choices,” write Lee and Yoo.
For an individual, the financial consequences of these behavioral changes may be profound over a lifetime. Households that start out with identical net worths as renters tend to diverge sharply based on whether they give up on buying a home.
“Despite their similar starting points, the discouraged renter quickly falls into a near-zero wealth trap, while the hopeful renter gradually accumulates assets and substantially narrows the gap with initial homeowners,” the economists write. As housing affordability declines, more households fall into the discouraged group, producing a more polarized and unequal wealth distribution.
And, because children of homeowners are more likely to own a home themselves, the wealth trap of housing despair may severely impact the financial prospects of future generations, say Lee and Yoo.
“In this way, giving up homeownership can act as a transmission mechanism that entrenches and amplifies wealth inequality over generations, potentially leading to a society in which homeownership becomes increasingly out of reach for households without intergenerational transfers,” they wrote.
Realtor.com® senior economist Jake Krimmel notes that one of the surest benefits of homeownership is forced savings, with part of each monthly mortgage payment going toward principal and building equity in the home.
“Building wealth is a slow process because it harnesses the power of compounding over time. Trying to hit the lottery through speculating on financial assets from your phone—however fun it might be—is almost certain to fail in the long run.”
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