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Debt: the Good, the Bad and the Ugly

Another housing crisis looms as millennials struggle to find homes they can afford

Micro housing could be the solution to helping millennials afford a home. Home change via

I co-teach a freshman seminar at the University of Texas called “Debt: the Good, Bad and Ugly” that examines the different ways consumers borrow and spend. Do they reflect wise investments in the future (the good), unnecessary or frivolous spending that should be avoided whenever possible (the bad) or spending that can ruin your life (the ugly)?

Virtually every person in this country will end up in debt at one point or another, and understanding the ins and outs is essential for all of us. It’s also the reason I focus my seminar and research on the topic of consumer debt.

In the months to come, my new column will explore the same themes I teach freshmen at UT, such as the psychology of spending, the ways debt affects millennials and people of color, and how both individual knowledge and structural factors can help consumers avoid the traps of ugly debt.

This inaugural column expands on themes I explored in an article several weeks ago on National Homeownership Month, held every June since 2003, and how the housing industry has little to celebrate this year.

Homeownership rates have been falling since 2005 and are now at a 26-year low of 64%. And millennials are especially feeling the pinch, with the rate down 7.3% in the last decade for people aged 18 to 34.

Results of a survey released last week by the MacArthur Foundation provide even more somber news for the housing industry. Also, demographic and other trends suggest that the US may be headed for another housing crisis and that home prices may plunge in the not too distant future.

While the looming housing crisis won’t be as serious as the recent subprime mortgage-fueled collapse that triggered a global financial crisis, it will be a major setback for the US economy, which is still struggling to escape the lingering effects of the Great Recession.

A temporary solution, however, may be available. This solution will work only if real estate developers and elected officials are willing to think outside the box and consider new and innovative ways to make housing affordable for millennials and others.

But first, on to the survey.

Worst is yet to come?

MacArthur’s 2015 How Housing Matters survey reveals that three in five Americans either believe that the country is still in the midst of the 2007 housing crisis or think the worst is yet to come. More than half view housing affordability as a fairly or very serious problem.

Escalating rents and housing prices have forced the majority of Americans to make tradeoffs or sacrifices in order to pay their monthly housing expenses. Approximately 20% have been forced to hold a second job or find other ways to increase their income, 17% have stopped saving for retirement and 14% made ends meet by borrowing on their credit cards.

Millennials are particularly vulnerable. Americans across all generations believe that it is hard for millennials to find stable and affordable housing, and the MacArthur survey indicates that 67% are being forced to sacrifice in order to pay for housing.

Despite their views and aspirations (most still see homeownership as an excellent long-term investment and want to own one day), 80% of young adults reported that that it is hard for them to find affordable housing to purchase.

A looming crisis

And that bodes ill for the housing market because, by the end of this year, millennials likely will be the largest living generation. They are already the biggest group in the workforce. Their inability or unwillingness to buy the homes baby boomers own and will need to sell, or to buy the homes developers are building, foreshadows a looming housing crisis.

It is possible, though, that millennials are rejecting the homes boomers are selling (or the homes developers are building) because of a size mismatch, which bleeds into the affordability issue. Houses keep growing larger at the same time that US households are getting smaller.

For example, the average size of newly constructed single-family homes in 1980 was 1,740 square feet. By 2007, the first year of the recent recession, the average home had reached 2,521 square feet, a 45% increase. Home size began to come down for a few years after the crisis but hit a new record in 2014 at 2,657 square feet.

At the same time, the number of people who live in households continues to shrink. The number of married households has dropped from about 60% in the ‘80s to less than half of all households by 2014. Those consisting of only one person have climbed to about 27% from less than 20% three decades ago.

The average household size, which was 3.33 in 1960, dropped to 2.76 in 1980 and reached a low of 2.54 last year. Millennials are especially likely to live in a single-person household because they are delaying both marriage and child rearing.

Micro-housing may provide a Band-Aid

A promising housing solution for people who are willing to trade square feet for lower costs is smaller (mini, minim, micro, tiny) houses or apartments that generally are less than 500 square feet – something much more common in major cities.

Micro-housing is generally associated with sustainable or environmentally conscious housing movements because the smaller size of the housing reduces the occupants’ carbon footprint.

But micro-rental units can also provide affordable housing for the growing number of renters who cannot find affordable rental housing, or who still cannot afford to buy a homes.

Smaller and less expensive rental housing can help millennials who want to become homeowners save enough money for a down payment. And, micro-homes may be appealing to single millennials who want to become homeowners but cannot afford or are not interested in buying homes that are suited for married couples who have children.

Unfortunately, zoning ordinances and building codes often make it hard for developers to place micro-housing in neighborhoods because of minimum square foot requirements and because of regulations that prevent builders from placing more than one structure on a single lot.

In addition, lenders often refuse to finance tiny houses that are smaller than 500 square feet. And existing homeowners routinely oppose having micro-housing in their neighborhoods.

Making affordability a priority

The real estate industry must do a better of job of ensuring that available housing meets the needs and desires of millennials, and US political leaders must ensure that housing policies are flexible enough to encourage and subsidize a broader range of housing types that can attract them.

While most Americans surveyed in the MacArthur poll wanted their state and local elected officials to treat housing affordability as a priority, only 14% felt they are doing so.

Given stagnant wages for most American workers, micro-housing will not completely solve the housing affordability problem. But smaller dwellings at lower costs will help financially struggling renters, should bring millennials one step closer to becoming homeowners, and potentially can avert another housing crisis.

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