Where will SF millennials move when they need to raise a family?

Household creation is still being depressed despite strong job creation and rising real estate values. The big question is, will millennials be the cause for continued increase in single family home prices? Will they need more space and outgrow the new condo developments throughout San Francisco?

The 2008 recession brought new housing construction to a standstill in San Francisco. High unemployment and falling levels of household wealth hampered real estate’s recovery—even if people were willing to buy new housing, everyday buyers were in no position to take on a mortgage. New construction stalled as the market struggled to absorb the excesses of the previous decade.

Now that San Francisco real estate prices have soared, the presence of new construction is puzzling. The economy is nearing full employment, and the population has continued to grow steadily since the peak of the housing boom. There are more workers than ever with steady paychecks looking for housing, and historically low interest rates should make mortgage payments unusually affordable. But will millennials keep buying properties they might not be able to raise a family in?

Nationwide, demand for existing homes has recovered, and sales of existing homes recently returned to levels seen during the mid-2000s. But new housing construction remains lower today than in the early 1990s, when the US had 60 million fewer citizens. So what’s holding housing back?

Millennials are on Hold

The millennial generation faces many challenges. The 2008 recession had a disproportionate impact on younger workers: When unemployment was at its peak, millions of young people delayed starting their careers, choosing instead to pursue further education. Millions of others grew discouraged in their job search and simply dropped out of the workforce entirely. As a result, the workforce participation rate for workers who are 16- to 24-years old has only partially recovered from the recession—this generation is still about 6 percent less likely to participate in the workforce today than in 2007.

The housing market is still being affected by millennials’ setbacks. Many young people who delayed starting their careers also delayed forming new households, limiting the demand for new construction. Population growth itself does not drive demand for new housing; rather, new homes are only needed when people move out on their own. Young people still living with their parents, sharing apartments with roommates or staying in college dormitories are not contributing to demand for new housing. Despite steady population growth, the annual rate of new household creation is still approximately 300,000 units lower than it was in the mid-2000s.

This gap in household creation can almost entirely be attributed to the youngest generation of workers. Since people generally only move out on their own once, the majority of new household creation occurs in early adulthood. Among those aged 25 to 29, fewer people currently head their own households than any point since the early 1960s.

Pent-Up Demand

Unlike much of the recession’s damage, the missing household creation will likely be recouped in the coming years. For most people, household creation is an inevitable part of life. The improving labor market is bringing millions of discouraged workforce dropouts back to the job market, and the labor participation rate should soon recover for young workers. As the millennial generation finds its financial footing, moving into a new home will be the first priority for many, and demand for new housing construction will finally pick up.

Single Family Homes versus Condos in San Francisco?

I grew up in Monterey Heights in a home that had a front and backyard. I was fortunate to live in a single family home with a dining room, living room, bedrooms for my parents and siblings. I could not imagine growing up in a condo. Question is: will the millennials be raising families in one and two bedroom condos in San Francisco. Or will they eventually move into homes in the Sunset and Richmond or in the East Bay?

Is there a shift in the SF condo market?

Right now, the South Beach neighborhoods are experiencing something new. Price reductions! In the past 30 days, there have been 11 active listings that have experienced a price reduction. Compared to 13 over the last 12 months. This is going to be an interesting trend to watch through summer 2016. More to come.