The unfortunate (and sad) housing story of Millennials can get boring and repetitive, but maybe Millennials have reason to be upset. Think about it, they keep getting crushed in the real estate market while baby boomers keep coming out on top. Even one of Wall Street’s biggest investment banks thinks so.
Bank of America research strategists led by Ohsung Kwon wrote in a new report that there was a “massive transfer of wealth from the public sector to the private sector” for two reasons: Government debt rose from 31% of GDP to 120%. From 1980 to now, the 10-year bond yield has risen from 12% to 4.6% (at press time, the 10-year bond yield was 4.9%). Add it all up, and household wealth increased from $17 trillion to $150 trillion, a record high.
Who is the winner in this wealth transfer? Baby boomers—they’re especially winning in the housing market. Bank of America says they and the “traditionalist” generation own two-thirds of total net worth, with baby boomers alone owning more than half of all wealth, much of it in financial assets including real estate.
Baby Boomers locked in the best deals, Millennials missed out
To be sure, when baby boomers entered the housing market in the 1980s, mortgage rates were very high, and as Fed Chairman Paul Volcker tried to lower inflation, which was as high as 14%, mortgage rates Reached a peak of around 18%. But with interest rates falling, baby boomers have now had many years to refinance their mortgages, and they’ve done just that, leaving the vast majority of them with mortgage rates below current market rates .
Similar to a repeat of the 1980s, inflation reached its highest point in four decades in June last year. Since then, Federal Reserve Chairman Jerome Powell has adopted the Volcker strategy and raised interest rates multiple times. As a result, mortgage rates hovered around 3% during the housing boom fueled by the pandemic before soaring to 8%, the highest level in more than two decades.Currently, the 30-year fixed rate is Slightly less than 8%. Bank of America notes that this means that, just as before mortgage rates rose, many homeowners are locking in low rates — except for millennials.
“Everyone except Millennials is locked in at 3% mortgage rates,” the bank said. “On the cost side, most baby boomers have locked in lower mortgage rates, with effective mortgage rates still below pre-COVID levels. The only group to meaningfully pay down their mortgage debt since 2021 is Millennials , an increase of 20%.”
Mortgage rates for nearly all outstanding borrowers are below market rates, fueling the so-called lock-in effect, or golden handcuffs on mortgage rates. Simply put, potential sellers won’t sell for fear of losing out on low interest rates. This puts pressure on supply, which is already tight given the underbuilding in the housing market. According to another forecast, existing home sales have fallen to their lowest level since 2010 and may further drop to their lowest level since the early 1990s.
Homeownership rates fall, affordability drops significantly
So consider this, the mortgage rate shock, limited supply, and massive home price increases during the pandemic-driven housing boom have left Millennials in a worse position than perhaps any other generation so far.
For one, homeownership rates are much lower among younger generations. By age group, less than 40% of people under 35 years old own a home; more than 60% of people aged 35 to 44 years old; more than 70% of people aged 55 to 64 years old; and slightly more than 65% of people over 65 years old. Below 80%.
Additionally, Bank of America said affordability has declined significantly since 2021, citing the National Association of Realtors’ Affordability Index. It’s clear that the surge in mortgage rates in such a short period of time, coupled with the fact that home prices remain high and continue to rise in some markets, has caused affordability to deteriorate to levels even worse than at the height of the housing bubble.
Baby boomers are either not greatly affected or are thriving
“Baby boomers certainly didn’t feel the impact of the rate hikes, and we believe many wealthy boomers actually benefited significantly,” the bank wrote.
And, they’re definitely spending money. Bank of America data shows that baby boomers and traditionalists, also known as the silent generation, are the only groups increasing their spending; they also account for 40% of total consumer spending, the strategists wrote.
“Baby boomers typically spend less on big-ticket items (homes and cars) but more on health care, home improvements and entertainment,” Bank of America said. “As ultra-low interest rate mortgages incentivize people By living in their homes longer, we could see an increase in home improvement spending among affluent baby boomers.”
At the same time, the report noted, younger generations are bearing the brunt of rising interest rates as spending declines and credit card delinquencies rise. Younger millennials aged 30 to 39 are the only group today with higher credit card delinquency rates compared to pre-pandemic levels. Still, Millennials as a group are spending more on housing — likely due to rising housing costs. Still, we may be in the midst of the next great wealth transfer.
“The housing market may struggle given rising interest rates, but the wealth transfer from baby boomers to millennials is supportive, particularly in luxury housing,” the bank said.
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