Why Millenials' Economic Position Has Dramatically Improved

Those millennials fortunate enough to own homes - a growing proportion - have benefitted from the rise in housing prices, which has catapulted them past earlier generations behind whose economic status they once lagged. JL

Federica Cocco and Andrew Van Dam report in the Washington Post:

In the past, a once-every-three-years survey held discouraging news for millennials. After adjusting for inflation, their wealth lagged behind where their Gen X and boomer parents had been at the same age. But in 2022, millennials had taken the lead. Home equity emerged as the wealth-creation hero. The eldest millennials — now in their early 40s, boast twice the median home equity a Gen Xer did at that age. They also enjoy a substantial lead over boomers. The unluckiest generation benefited from exceptionally lucky timing. From 2019 to 2022, home prices catapulted 41%

You’ve probably seen the memes: “Me in my 30s” versus “my parents in their 30s.”

The parents appear as a young couple discussing whether to have their third child or buy a “lovely second home for our family to winter in” and hoping the garage can fit both their cars and their snowmobiles. Fast forward to one of those offspring, now also in his 30s, wondering whether he’ll ever recover financially from buying both milk and bread at the same time.

 

This isn’t the Department of Fact-Checking Memes — honestly, we’re not sure FDR himself could find the budget to fund such an agency. But is this one true? Or at least truthy? Are zoomers and millennials somehow being denied access to the American engine of upward mobility that made boomers the most prosperous generation ever?

Well, maybe not.

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At least that was our first response when we turned to our beloved Survey of Consumer Finances. The Federal Reserve survey is a perfect resource for this meme-checking mission. For decades — dating back to when boomers themselves were hard(ish)-rocking, penniless rebels — the Fed, with the help of NORC at the University of Chicago, has asked Americans about their balance sheets, surveying anything from antique collections to gambling activities, from life insurance policies to home equity.

In the past, this once-every-three-years survey held discouraging news for millennials. After adjusting for inflation, their wealth lagged behind where their Gen X and boomer parents had been at the same age. But when we incorporated the latest survey, conducted in 2022, we were shocked to see millennials had taken the lead.

And home equity seems to have emerged as the wealth-creation hero. The eldest millennials — now in their early 40s, old enough to sue for age discrimination — boast about twice the median home equity a Gen Xer did at that age. They also enjoy a substantial lead over boomers.For once, the unluckiest generation seems to have benefited from exceptionally lucky timing. From 2019 to 2022, home prices catapulted 41 percent, making it the best three-year period on record, according to the home-price prodigies at the Federal Housing Finance Agency.

And millennials were perfectly positioned to maximize their benefit. Many had only recently entered the housing market; suddenly, the biggest financial bet of their lives had paid off with unprecedented speed. They’d leveraged their 5 or 15 percent down payment into a claim on record appreciation of their home’s entire value.

But all flavors of assets aren’t created equal. The wealth created by rising home prices exists mostly on paper and is very hard to tap — which means it may not translate to a higher standard of living, said Jeremy Horpedahl, a University of Central Arkansas economist who closely tracks millennials’ fortunes.

“Wealth may have gone up, but if that’s mostly housing wealth, then that’s not actually making people better off,” Horpedahl told us. “They might sell their house, but they’re going to just buy another one, which has also gone up in price.”

Then there’s the harsh reality — as we’ve previously established — that many millennials have been entirely shut out of the housing market. That often leaves them renting. And the net worth of the typical American renter is just $10,400, a number that more or less vanishes when charted alongside the $396,500 in net worth claimed by the typical American homeowner.

“Housing is a crucial component for wealth accumulation,” said New York University economist Edward Wolff, America’s longtime wealthographer of record. “If you don’t have a home, you won’t benefit from house appreciation, which means most of these families will not show any gain in their overall net worth over time.” Wolff said this becomes an especially difficult problem “when you reach retirement age, because you won’t have any resources to support your retirement and afford care when you are elderly.”

About two-thirds of Americans own their homes, which gives them the ultimate hedge against inflation. While renters are subject to the whims of rent-hiking landlords, payments on a fixed-rate mortgage won’t budge for 15 or 30 years.

Sure, property taxes or insurance might go up. But the basic monthly mortgage payment usually won’t. This means that while homeowners are gaining excess investment returns, they’re also saving more and more money as wages rise. With their biggest expense locked in, they also have an easier time budgeting for the future.

Renters, of course, have no claim on that same financial security, leaving them poorly situated for wealth accumulation. Over the past 33 years, the median wealth gap between homeowners and renters has grown by 70 percent, according to the Urban Institute.

As long as we don’t have enough housing to go around, Horpedahl told us, that inequality will continue to grow. The lucky folks who can still afford to buy a place at the table will see their wealth pushed up by rising home prices. But the very same force that’s elevating their net worth will be lifting the housing ladder out of the reach of more of their peers.

So, how do millennials fit into this large and growing split between the haves and have-nots? Does it look like they’re thriving overall simply because the haves are doing particularly well?

Not so fast.

Housing — and its investment returns — may build wealth, but you know what usually doesn’t?

Living with the aforementioned parents.

Many young folks, caught on the wrong side of that record surge in home prices, are doing just that. In 1989, when our Fed data begins, just 11.5 percent of young adults between the ages of 25 and 34 lived with their parents. By 2022, this rose to 17 percent, according to the Current Population Survey.

And folks living with their parents or roommates aren’t counted in this data, at least not the same way as those who have gone off on their own.

Due to the difficulties of disentangling a family’s holdings, the Fed combines the wealth of “financially interdependent” household units and effectively assigns it the demographics of the head of household (or more accurately, what the Fed calls the “economically dominant single individual or couple” in the home’s “primary economic unit”).

So, when we say millennials have record wealth for their age, we’re really saying millennials who have become financially independent are doing well for their age.

If we could correct for this, millennials wouldn’t look so hot after all — financially, at least.

The Fed’s survey might be the most valuable source in America, pound for pound. It’s one of the only tools we have to measure the wealth disparities that define so much of our economic and political lives. But we can’t forget its blind spots.

By largely focusing on the winners who have left their family’s financial support behind, we’re really only getting a picture of the most successful young Americans.

It sounds an awful lot like survivorship bias, a phenomenon famously illustrated by Austro-Hungarian-born Abraham Wald in World War II, when he was at Columbia University, part of a group of statisticians helping the Allied powers. The U.S. military brass handed Wald’s group figures on where U.S. warplanes had collected the most bullet holes — many in the fuselage, few in the engines — and asked where the plane’s armor should be improved.

Most of us, these officers included, might assume the armor should probably go where all the bullets were hitting. But Wald had the brains to suggest the opposite: reinforce the spots with the fewest bullet holes.

His insight, of course, was that the military was collecting data only from the planes that made it home. The planes that were shot in truly vulnerable spots, such as the engines, usually dropped from the sky — and out of the dataset.

Because they could measure only the survivors, military brass, kind of like the Fed today, were getting an incomplete — and probably inaccurate — picture of the entire population.

That brings us back to the “my parents in their 30s” meme. We thought we were poking holes in it, but while it may not be true across the board, it certainly applies to a substantial subset of American 20-somethings and 30-whatevers.