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MARKET WATCH

The Millennial Generation: Part II–Perspective, Preferences & Housing

Posted by John Greene on June 26, 2015

Since the latter half of the 20th century, generations of Americans have been loosely associated with certain defining trends or historical events that highlighted their particular moments in the limelight. The Greatest Generation is identified with its unwavering sacrifices made during WWII; Baby Boomers embody the post-war population explosion and the components that comprise the archetypal American dream—sprawl, consumerism, and freedom; Generation X came of age during the 1980s and is aptly coined the “MTV Generation” as they were the first to grow up with (or, on) cable TV. Generation Y, or the Millennial Generation, is routinely identified by its dependence on all things technological and, while this characterization is accurate to some degree, it only offers a shortsighted snapshot into the largest generation of Americans in history. Rather, Millennials possess a keen ability to prioritize and innovate that has been defined in large part by a single event: The Great Recession of 2008.

As outlined in the first part of this series, Millennials as a group are facing increasing financial challenges in an environment that offers them little in the way of financial opportunity. While 22 million aged 18-34 are still living at home, this generation demonstrates financial creativity and thriftiness that is almost reminiscent of their grandparents’ and great-grandparents’ era—those that came of age during the last century’s Great Depression. Make no mistake: I am not comparing a modern expectation of cell phone coverage to a lack of food, water and shelter. But, all things being relative, generations that are burdened by seemingly overwhelming obstacles ultimately find resourceful ways around those obstacles, and Millennials are no different.

Previous generations equated ownership with accomplishment, and Millennials are inventing new ways to derive the same benefits of ownership for less money, in less time, and with fewer headaches. The tremendous growth in the modern sharing economy—an economy in which expenses, goods, and other financial responsibilities can be shared, leased and/or bartered—represents a significant change in the American consumer psyche, and Millennials are driving much of this change. “Life” is incredibly expensive in modern America, and millennials clearly see this reality as a problem that demands a workable solution. Entire markets have sprung up virtually overnight based on filling these needs:

  • Uber allows individual drivers and riders to connect via its smart phone app to arrange for transportation in place of traditional cab companies.

  • Cort Furniture offers home furniture on a leased schedule. Rather than purchasing and hauling furniture from city to city, Millennials can simply rent what they need, when they need it, wherever they happen to be.

  • Airbnb is a network that allows overnight travelers to connect with homeowners who wish to rent out a room, effectively taking the place of a traditional motel.

Anyone attempting to downplay the staying power of a uniquely-positioned service provider within the sharing economy needs look no further than Uber; the company was valued at over $18 billion in 2014. Technology is at the center of sharing markets as mobile phone apps enable these types of businesses to travel virtually any and everywhere with their users. For enterprising businesses—even those within longstanding industries—it is imperative that they constantly develop and improve their customer experiences with a focus on technology. Business models must also be tweaked to address the workable solution that millennials are constantly building upon; a Goldman Sachs report refers to this preference as “access, not ownership,” which changes the economic landscape when 92 million consumers are at stake.

 

A Change in Perspective

As a 2014 Time report on Millennials details, the Great Recession of 2008 has impacted this generation in a number of ways. Many of them have spent their formative young adult years in a post-2008 economy that has been slow to recover and offers little opportunity. They have grown up in frugal households where circumstances have necessitated that dollars be stretched to their limits. Younger Millennials witnessed the devastation wrought upon their parents’ savings and retirement accounts during the economic collapse, and they are inherently distrustful of Wall Street; a poll of roughly 1,500 Millennial adults found that 52% had no confidence in the stock market as a retirement option, and only 32% said they had considerable savings in stocks. However, Millennials that actually do enroll in 401(k) or other corporate retirement plans are far outpacing older generations. 70% of participating Millennials started saving for retirement at an average age of 22, compared to the average Baby Boomer who began saving at age 35.

Millen_1

Whether they are aggressively saving in a retirement plan or filling up a piggy bank, this generation is demonstrating a financial maturity that is a direct result of having lived through the collapse of 2008. As they age and their buying power increases, their priorities and unique demands are quickly redefining markets.

 

Shifting Priorities

Millennials are the first generation of Americans to grow up in the age of customization. As consumers, they place immense value on what amounts to nimble purchasing options, and they will buy from companies that actively engage them, seek their opinions for product improvement, and otherwise involve them as members of the brand tribe. Industries immersed in outdated, rigid sales and operating methods will quickly be forgotten if they don’t change their business models to actively court and ultimately satisfy Millennials. They value brands and companies that embrace authenticity and civic and environmental responsibility, and they are not affected by sly advertising tactics. To be sure, they are savvy buyers who bring their sense of morality along for shopping trips.

Market options abound and Millennials are keenly aware of their purchasing power. Products and services that they are not willing to pay for include:

  • Televisions & Pay TV: While plasma and LED TVs replaced traditional tube TVs seemingly overnight, Millennials prefer other digital entertainment options such as smart phones, tablets, and PCs. A Nielsen study found that most households without a TV tended to belong to those under 35, a demographic that accounted for 44% of all TV-less households. Why pay for cable or satellite when there are free workarounds to watch your favorite shows?

  • Landline Telephones: Not surprisingly, the generation that relies on wireless devices has no use for yesteryear’s technology. Over two thirds of Millennials live in homes without landline telephones.

  • Newspapers/Print Media: Again not surprisingly, Millennials’ penchant for technology has rendered print resources virtually obsolete within their demographic. The New York Times reports that approximately 10 percent of its print subscribers are between the ages of 18-24.

  • Big Beer/Big Food: With a tangible sense of skyrocketing healthcare costs, Millennials as a whole are more aware of the importance of general wellness and fitness than are older generations. They are more likely to implement healthy eating habits (24%) and less likely to smoke and abuse alcohol. 80 percent of them want to know more about where their food comes from and how it is grown/harvested, and 30 percent of them prefer foods that are certified organic. When they do drink beer, they prefer small “craft” brews to the mass-produced suds that previous generations gravitated towards.

More Bad News for Detroit

Surprisingly, the sector that appears to be facing the most potentially disastrous challenge with the Millennial generation is the auto industry. While members of previous generations equated teenage freedom with earning a driver’s license—usually spending their sixteenth birthday in line at the DMV—Millennials are not so enthusiastic about cars, driving and auto ownership in general. In 2008, only 31 percent of 16-year-olds had a driver’s license compared to 42 percent in 1994. Phone apps and programs such as Skype have the power to make virtually all relationships portable; there is no need for teenagers to pile into a car and head to the mall just to “hang out.” Technology is the primary interest of this generation, as gadgets have supplanted classic Mustangs and Corvettes. Plus, without steady paychecks to rely on, iPhones and data plans are a lot more affordable than Mustangs.

The success of Uber and other sharing platforms like Zipcar and Carshare alone represents the shifting priorities of Millennials when it comes to automobiles. Transportation, regardless of mode, is meant to carry one from point A to point B… and that’s it. Why incur the added costs of owning a car—loan payment, maintenance, fuel costs, insurance—when you can pay for alternative on-demand transit from a public source or from a car owner that hasn’t yet figured out that owning a car is passé? Consider the following:

  • From 2007-2011, the number of cars purchased by those aged 18 to 34 fell almost 30 percent.

  • Millennials are 29 percent less likely to buy a new car/truck than Gen Xers or Baby Boomers.

  • Adults aged 21-34 buy only 27 percent of all new vehicles compared to 38 percent in 1985.

As author and economist Jeremy Rifkin notes, “25 years from now, car sharing will be the norm, and car ownership an anomaly.” Clearly, Millennials have other priorities in mind when it comes to spending what hard-earned money they actually do have.

 

Housing: Positive Outlook

Most data related to housing is prone to volatility and is constantly being revised. As America’s largest generation continues to age and ease into homeownership themselves, the data will still be precarious from quarter to quarter. That said, the fact of the matter is that everyone—regardless of age—seeks out and, indeed, needs a place to live and call home. It is a fundamental human characteristic and while some prefer the density and convenience that urban living provides, others prefer the suburbs or bedroom communities that so affect US housing start numbers.

The good news for industries that serve and support housing growth, including the forest products industry, is that Millennials—by a clear majority—desire to own their own homes rather than rent. And while there are obstacles that make this goal difficult for them to achieve, the desire to actually own their own homes is representative of their ability to prioritize.

Compared to older generations, an overwhelming number (93 percent) of Millennial renters hope to own their own home one day compared to Gen X (75 percent). And while other industries may be losing traction with this demographic, the National Association of Realtors (NAR) has compiled a very detailed report (2014 data) on generational trends that provides valuable insight.

Broad Trends

  • Per an Urban Land Institute study, 62 percent of Millennials prefer to purchase a detached single-family home compared to 28 percent who prefer some type of multi-family home.

  • When asked about the primary reason for purchasing a home, a desire to own a home of their own was highest among Millennials (39 percent) compared to Gen X (23 percent).

  • When asked about the timing of purchasing a home, 52 percent of Millennials said that they were ready to buy a house compared to 44 percent of Gen X.

  • The single largest group of recent homebuyers was Millennials (34 and younger) who composed 32 percent of all buyers.

  • 84 percent of Millennial buyers considered their home purchase a good financial investment. Since they don’t trust Wall St., they’re choosing to invest in their own properties.

Financial Trends

  • The median age of millennial homebuyers was 29, median income was $76,900, and they typically purchased a 1,720-square foot home costing $189,900.

  • 97 percent of recent Millennial buyers financed their homes (88 percent overall).

  • The average downpayment for a Millennial homebuyer was seven percent.

  • 22 percent of Millennial buyers said saving for a downpayment was difficult; 52 percent cited student loans as the major source of debt affecting their savings rate.

  • Among all buyers by loan type, Millennials comprised the smallest percentage of conventional loans (56 percent) but the largest percentage of FHA loans (28 percent).

Home Type & Location Trends

  • Detached single-family homes represented 80 percent of the homes purchased by Millennials.

  • Seven percent of Millennial buyers bought an apartment, condo or duplex in a building with two or more units.

  • The share of Millennials buying in an urban or central city area increased to 21 percent.

  • 87 percent of Millennials bought previously-owned homes; 13 percent bought new homes.

  • Millennials favor older homes based on a perception of overall value. 24 percent purchased a home built between 1961-1984, and 23 percent purchased a home built between 1913-1960.

  • Millennials place a high importance on home location and convenience to job (74 percent), and 39 percent said commuting costs alone were very important in their decision-making process (yet another sign that individual car ownership is fading with this generation).

 

Final Thoughts

While digging into some of the minutiae within the NAR report is certainly helpful in charting trends and forecasts, the key takeaways for those invested in the housing market are quite simple:

  1. Millennials clearly want to own their own homes (93 percent).

  2. They are currently saving and are willing to sacrifice spending on other items to make it happen.

As our own housing starts forecast model illustrates below, the general increasing trend over the next ten years is positive news for the industry and would account for a growing number of Millennials entering the housing market as new buyers.

housing_June_15

It would be unrealistic to expect millions of Millennials to suddenly flood the housing market in the near term simply because they want to purchase a home of their own. And with a relatively shallow supply of inventory, tight financing and minimal savings for downpayments, it would be an impossible prospect. As this generation transitions from renting to owning, it will likely be a much slower and steadier process than a typical American “bubble/bust” market cycle.

Perhaps the most encouraging sign going forward—despite the uninspiring economic outlook—is that Millennials do, in fact, possess the ingenuity and motivation to chase and achieve their aspirations. While their version of the American dream will most likely take longer to realize and may differ in scope from previous generations, a solid foundation has been laid beneath them. With their continued ability to creatively solve problems by developing successful new markets in the near and long terms, there is every reason to believe that Millennials will indeed achieve an American dream—one that includes home ownership—of their own.

Mill2Market Weekly Lumber Report

Topics: Consumer Trends

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