Episode 10: Millennials: What the Data Tell Us
Double Take explores what the latest demographic data and how the pandemic might affect millennial household formation and consumer choices.
Rafe Lewis: Hi, and welcome to Double Take, the Mellon podcast. I'm your co-host, Rafe Lewis, director of the investigative research team here at Mellon's Boston headquarters.
Jack Encarnacao: And I'm your other co-host and investigative researcher, Jack Encarnacao. Today on Double Take, a deep dive into the massive generational and demographic changes washing over the United States, and what it means for investors. From the sunset of the baby boomer generation, to the ascendancy of the millennials, to the up and coming Gen Z nipping at their heels, much change is afoot. It seems you can't swing a participation trophy without hitting another story about how different millennials are from their predecessors, and how that will have widespread ramifications in the workplace and the economy in general.
Jack: So, we thought we'd take a deep dive to see how accurate the stereotypes really are. Rafe, who's going to help us take that dive?
Rafe: Well, we'll kick off the program with Dr. Richard Frye, who is a senior researcher at the Pew Research Center in Washington. Following Rick, we'll hear from Mellon's own Nicholas Cohn, who's a portfolio manager and senior research analyst who covers among other things, consumer and housing related equities.
Jack: But first a little background on Rick Frye. Dr. Frye obtained his doctorate in economics from the University of Michigan, and for several years he was a senior economist at the Educational Testing Service. Since 2002, he's been at Pew, where he's become a recognized expert on American demographics and social trends, whose expertise lies in analyzing U.S. Census Bureau data.
Jack: Rick, welcome to Double Take. It's great to have you.
Dr. Richard Fry: Great to be with you.
Jack: Oh, this is wonderful. Hey Rick, why don't we start by level setting the conversation a little bit and have you just define for us the current generations in the United States. We hear a lot obviously about the silent and the boomers. But kind of what years did they begin and end, and how big are they relative to each other, that kind of thing.
Dr. Fry: Okay. Yeah, happy to do that. So, I will sort of go with from sort of the oldest, to sort of the youngest. These are Pew Research Center definitions. The silent generation were those that were born during the Great Depression. They were born in 1928 to 1945, so today they'd basically be those over 75 years old. And as of 2018, it was about 24 million Americans, part of the silent generation.
Dr. Fry: Then we get to the big baby boom generation formed from the GIs returning. The backbone was about 76 million births from 1946 to 1964. The boomers today are 56 years of age to 74. And as of 2018, there's about 73 million baby boomers.
Dr. Fry: Then we come to sort of the baby bust, generation X, that was born 1965 to 1980, according to Pew definitions today, that's Americans between the ages of 40 and 55. There's about 65 million members of generation X, so currently smaller than the boomers.
Dr. Fry: Then you sort of get the baby boom echo, or what has now commonly been referred to as the millennial generation. That's Americans born between 1981 and 1996. They're now 24 years of age to 39. Started to almost press 40. As of 2018, there was 72 million millennials, slightly less than the number of current baby boomers. But the millennials probably as of now, we only have data through 2018 but probably as of now, the millennials have probably overtaken the boomers.
Dr. Fry: And then we have generation Z or what we're currently calling generation Z. We'll see if that label sticks. But that's Americans born after 1996. So, the oldest Gen Z-er is 23 years of age, and the Pew Research Center has not sort of tried at all to delineate when the youngest Gen Z-er was born, and so I really can't give you a population figure for Gen Z, because I don't... I don't have a way to define it yet. So, that's sort of the current constellation of generations in America.
Jack: Thanks very much for that. So, if I'm not mistaken. The baby boomers had about a dozen years in which they saw more than 4 million births a year, but the millennials only had a few years like that. So how are millennials even remotely close in size to the baby boomer generation?
Dr. Fry: Yeah, that's a very interesting observation. And so just to sort of put some numbers on it here, there was 76 million births in the baby boom, and at their peak there was 79 million baby boomers. And so what that sort of tells you is that immigration was not, it didn't really impact too much the ranks of the baby boom generation as they matured. You're right. Not so, with the millennials. The millennials sort of, you look at the births constituting them, they were only 62 million. They're up 72 million now. And the Census Bureau projected at their peak they're going to peak at about 76 million. So, so what goes on there? 76 million but at least 62 million births. This tells you one of the, one of the demographic differences between the millennials and the boomers is that the millennials were coming of age when immigration to the U.S. during the eighties and nineties, we had big immigration flows including some children coming, coming on. So basically millennials, their numbers have been stoked by the immigration wave to the U.S. that we've experienced over the last 25 years.
Rafe: So does that mean that they are inherently more diverse than all the generations that came before them? Or at least you know, you know, if going back just to the silent generation cause and then we know there was a huge immigration wave before that. But as you know these current cohorts, so it is we, they are a more diverse generation. And what does that mean about, you know everything about them? I mean the way they live with their worldview, what they purchase, what they do?
Dr. Fry: Just to put some sort of numbers on it, the boomers are about 72% non-Hispanic whites, whereas the millennials are only about 55% non-Hispanic whites. So clearly you're right, the millennials, more racial ethnic minorities and that has implications. And let me just mention a couple of them. I sort of liked to think about the housing market when you sort of sort of look at sort of who presently is sort of most likely to live in sort of multi-generational living arrangements. That is, you know, grandparents and adult parents living with their children. You'll see racial ethnic minorities, Hispanics, Asian Americans, African Americans, they're much more likely to live in multi-generational living arrangements. And so the fact that the millennials are more diverse probably has an impact on the kind of housing arrangements and demand for houses and the kinds of housing they want. Similarly when we sort of look at sort of, well, where they live, the millennials are more metropolitan than the boomers are. 84% of boomers live in metropolitan areas, whereas 89% of millennials live in metropolitan areas. So you're right, it does. There's some of their demographic characteristics and their greater diversity does sort of impact some of their other characteristics.
Jack: Does the data tell us anything, Rick, around millennials living in cities and urban centers because they prefer it or because they just wait longer to form typical suburban households than the prior generation?
Dr. Fry: I, on the preferences, I sort of don't want to weigh in on that. What I will say is this is on when we look at young adults, today's young adults are more likely to live in what I'll call sort of the urban boards in this, basically the inner central counties of major metropolitan areas, rather than the suburbs. That's been true so far. The $64,000 question is, and I don't know the answer to it, and I don't think it's been definitely demonstrated is I mentioned that the oldest millennial is approaching 40. So the millennials, you know, they're not, they're not kids anymore. They're now sort of in sort of their core family forming years having children, and one of the $64,000 questions is that as they have kids and you know they get beyond preschools, are they going to sort of remain in those urban core counties, or like earlier generations, are they going to sort of go out to the burbs for possibly better schools and other characteristics? And I don't know if we know yet what the millennials are doing, but at least so far you're right, they have sort of revitalized our nation's urban core counties.
Rafe: You know, Rick, one of the negative stereotypes about millennials is that they came out of college, they were totally saddled with student loan debt and they ended up living in their parents' basements and disappointing to their baby boomer parents. But from what I'm hearing from you, that may be an unfair stereotype, in that, there may be some subset of this cohort that is a multi-generational household that may prefer to live like that. And some of this may be a choice rather than a obligation or a need.
Dr. Fry: Yeah. Yes. And I think so just as an example, we'll be sort of let's say get not the 18 to 24 year olds, but we say when we look at sort of the 25 to 37 year olds, sort of beyond when you sort of get beyond the schooling years, it is true that today's young adults are more likely to be labeled with mom and dad than earlier generations. But it's probably not the college educated who are the ones that have more of the student debt. It's much more, that's much more phenomenon of the less educated young adults than the better educated ones. So yeah, they are more likely to be living with mom and dad, but it's not because of student debt. At least not among the 25 to say 37 year olds. And I think there are some indicators that, yeah, sort of this sort of stereotype. Yeah, they are sort of started later to launch, but they're clearly pursuing more schooling and that's probably one of the reasons there were that are later to launch. And I think we can get into this. I think when you sort of go out and you sort of look at how much are they earning, how much are they working? You know, the notion of sort of the lazy millennial I think doesn't sort of stand up to scrutiny.
Rafe: Got it. Yeah. That's a pretty good segue to what I was thinking of next, which is just that, you know, when you think about the definition of the American dream, right, it's defined by social mobility, the idea that your kids can almost assured do better than the parents. And yet your research seems suggest that millennials are not necessarily obtaining the American dream by those standards. That those non-college education cohort is actually fairing worse than the Gen X and baby boomers.
Dr. Fry: Yeah. Keep in mind that's true. I would say sort of an average statement sort of that, you know, millennials as a whole, both less educated and the better educated combined as a whole, I mean they're not doing worse off. It varies a little bit about what measure we would look at, but sort of where the clear differences come in is when we look at the sort of the colleges educated millennials compared to say the college educated boomers as an average statement, the college educated millennials are doing significantly better than the college educated boomers. Where the millennials are really struggling is, you're right, the less educated ones. The ones particularly that have not pursued any postsecondary education after high school, they are fairing significantly worse than say their boomer counterparts were back in the early eighties. Let me just sort of put some numbers on it. If we sort of look at sort of the earnings of full-time workers for a high school educated boomer back in the early eighties high school educated boomer made about $34,000. A less educated millennial today makes about $31,000. So where the millennials are struggling relative to their boomer parents, it's among the less educated ones. Similarly, if we look at their household incomes, the less educated millennials don't have the household incomes that the less educated boomers had. So where the millennials are really struggling, is among the less educated ones.
Rafe: And, and just to clarify, when you say the $34,000 income for the high school educated boomer versus $31,000 for the millennial, a high school educated cohort, are those inflation adjusted dollars or...
Dr. Fry: Yes, these are everything's basically that number was in 2018 dollars, yes. And everything, yes, I've adjusted for inflation. And that was for one that's sort of reported that the prior year they were working full-time. So this is sort of earnings of full-time young adults.
Jack: All right, Rick, that's great. So diving a little more into the actual millennial category itself, your work seems to suggest that we're starting to see some divergence among male millennials and female millennials. Can you talk about what the data shows there?
Dr. Fry: Yeah. This was sort of this divergence you already saw emerging sort of with Gen X, but the trend simply sort of continued. If we sort of look at the baby boomers back the eighties, the guys tended to be better educated than boomer young boomer women. That was a crossover in the late eighties and nineties already apparent among the Gen X as they were coming of age.
Dr. Fry: But now sort of what we see among millennial women, let me sort of first focus on education. Today's millennial young women, almost 40% of them have completed at least a bachelor's degree among their millennial male counterparts, around 33%, about a third. So there's about a good seven percentage point gap nationally between millennial women and millennial men in higher education attainment. If we sort of look at their earnings, the gap in earnings between young men and young women has narrowed. Roughly speaking, these aren't going to be exact figures, but back in 1980 amongst the young women, they were making be close to 70 cents on the dollar that a young men made. That gap has narrowed and now sort of young women make about 85% on the dollar that a young men makes. So there has been sort of a shift in roles where opportunities and career choices, as well as educational choices, in some areas, young women are significantly now outpacing young men.
Rafe: Well, that leads nicely back a little bit into the conversation about student debt, which is an overwhelming conversation for that millennial generation. Right? Like so I guess I, what I wonder is the, the perception at least in my Gen X generation is that the millennials have it a lot worse when it comes to student debt. School's more expensive, they need more levels of it to kind of attain the same level of earnings maybe that a millennial or a baby boomer could have had with just a BA or just high school. You know, it seems like it's always going up another step. Is it true? Do they have more debt? Are they more burdened?
Dr. Fry: Yes, but sort of put some numbers on it. And the data that I'm citing, okay, is coming from the federal reserve, they do their wealth survey every three years. That's where this is coming from. And I don't have, they've been doing this wealth survey, it goes all the way back to the 1980s but back in the eighties they didn't ask about student debt. So I don't have student debt figures for the boomers back in the eighties. What I can compare...
Rafe: That might be telling on its own right though, Rick, right? I mean the fact that they weren't asking means maybe it wasn't important.
Dr. Fry: Yes. So what I can do though is I can sort of compare, as of 2016, which was the latest fed survey we have, I can compare the millennials debt in 2016 to sort of what Gen X had when they were sort of young, similarly aged back in 1998 okay. And this is, these are household figures. That's sort of the unit of analysis that the fed works with.
Dr. Fry: Back in 1998 when we looked at Gen X-ers when they were basically 22 to 37 about 23% of Gen X households back in 1998 reported, I have some student debt. Whereas when we look at millennial households headed by millennials in 2016, 45% said I am paying student debt. So basically it's almost double the incidents. So in the space of a generation, yes, more millennials have had to borrow in order to finance their education. What may be surprising though, is now these what I'm going to report here is not the total amount of student debt they occurred, what the fed gives me is what do they still owe? In other words, given what they totally borrowed, plus they've been making some payments. What is their outstanding amount of student debt? If they had student debt, the typical Gen X household back in '98 had about 13 grand still remaining to pay off, whereas the millennials, 45% of them have it, but the amount that they owe at the media and half above, half below is about 19 grand still outstanding.
Dr. Fry: So yes, they're more likely to have student debt. They seem to have greater balances, but it's a judgement call how onerous still owing about 19 grand is. I think it's certainly not trivial. It may be having some impacts on sort of their other choices that they're able to make, but it's clearly not the, you know, 50, 60, 70, $80,000 that you occasionally sort of hear. So, but that's what the fed data shows.
Jack: Rick, you published a fantastic report in October highlighting that U.S. household size, meaning the number of people in the average household, is now increasing for the first time in over a century. Why is that happening?
Dr. Fry: At least there's several reasons. One is in fact, as I alluded to early in our conversation, the U.S. is increasingly a more racially and ethnic diverse country. And racial and ethnic minorities, they are much more likely to live in a multi-generational living arrangement that typically entails a bigger household. So sort of one of the sort of the long run driving factors here is sort of, again, growing racial ethnic diversity. More families choose to living with multiple families under their roof, so that's kind of a long run driver of rising household. But in addition there's also been a sort of a short run factor in the wake of the housing bust, in the wake of the great recession, household formation really slowed down. It really lagged. It especially lagged among the nation's young adults. It still hasn't sort of fully recovered. And so in the wake of the great recession, we simply had what I elsewhere have termed more shared living, more people either living with relatives or living with non-relatives. And so that again, more adults per household. And so yeah, it's rather startling. At least this decade, this is the first decade in a long, long time in which American households seem to be getting bigger rather than the longer end trend of getting smaller.
Rafe: But does the data say anything about whether the millennials and maybe the older Gen Z are buying into the traditional concept of family, marriage, having kids? I mean, what's happening there?
Dr. Fry: I certainly don't want to speak about about Gen Z on this because they're simply not old enough. So I think, I mean to some extent we've sorted out getting into sort of survey data which my colleagues are very good at it because some extent let's just sort of, look at the fertility numbers, what we get out of the Census Bureau. And I think on that score we know that they are sort of certainly at least postponing marriage, if not for going at all altogether and then, well norms have changed. Okay. One can sort of pursue family life possibly without marriage. But let's just sort of look at sort of how many children young women are having. And here we go. This is sort of, these are figures on the share of women who are childless who haven't had any births.
Dr. Fry: And what we saw back in 1980 if we look at 18 to 34 year olds, that's what the framework is. Back in 1980, 47% of 18 to 34 year old women reported that they had never given birth...were childless. By 2018 it is now 59% of 18 to 34 year old women are childless. So you know, one can possibly argue that it's not children foregone, but rather they're simply delaying. That's sort of possible. But I do think that the number of childless women is on the rise and I think it's I'm comfortable stating that one way that these younger generations are different is young women have many more opportunities available to them than was the case for their parents and grandparents. I think it's clear that young women are more school and work focused and at least in terms of having children, the evidence so far does suggest, I think, that they are less family oriented. Again, maybe they're only just postponing, but when you look at childlessness it's clearly up and so I think that is a fair indicator of that they may be less family focused.
Jack: Very, very interesting stuff. Rick, lastly, for you, the baby boomers are officially entering their senior years. What does the data tell us about how, if at all, they are different than prior generations and how they live, work, spend?
Dr. Fry: I would say I'll just point to sort of two things. In terms of sort of their wealth levels, again referring back to that federal reserve data, it looks to me like at least as of 2016, now granted the last three years we've had a greater run up in the stock market and in many housing markets, housing values have gone up. So maybe the 2019 numbers when we get them, will sort of moderate this observation. But at least as of 2016 the baby boomers as a whole at the median, their wealth levels were trailing the silent generation in the late nineties in their wealth level. So at least as of 2016 it looked like it looks like the baby boomers are going to sort of be the first generation that was sort of less prepared for retirement than the earlier older generations. Let's hope 2019 we'll reverse that, but we'll see.
Dr. Fry: So I would say a little bit less wealth than their silent counterparts at the same age, and it's very clear, I've also looked at the labor force participation. If you look at today's 65 to 74 year olds they are more likely to be in the labor force than the silent generation and the Greatest Generation was before them. Older Americans are working more than they used to. There's two, at least two reasons for that. Among the women, it's not surprising. Baby baby boomer women throughout their, over their whole entire lives, they've been more likely to be working than older generations of women. And so the fact that baby boomer women are working more it simply reflects the fact that they have throughout their whole lives. But it's even true among the men. Baby boomer men are working more than silent men were and Greatest generations men were at the same age. So, a little bit less wealth, but possibly reflecting better health status as well as sort of more education. The boomers are hanging on in the workforce longer.
Rafe: Well, that's their choice, I guess. Well, Dr. Richard Frye, senior researcher at the Pew research center. Thank you so much. This was really interesting.
Dr. Fry: You are very, very welcome.
Jack: Welcome back to Double Take, wherefore this episode we're drilling down into the ramifications of massive generational change overtaking the United States, and thinking about how the COVID-19 pandemic, the resultant recession, and the social strife that has erupted since may have altered the entire trajectory. So, we've heard what the data leading up to the pandemic were telling us. Now let's turn to the future, and how to think about what all these changes will mean going forward, particularly for investors. Rafe, please tee up our next guess.
Rafe: With pleasure. Joining us from his home office in Boston is Nick Cohn, who's a portfolio manager and senior equity analyst from now on, who covers consumer durables, home builders, housing related stocks, and a key way Nick does that is by diving down into demographic data and making forecast. So Nick, and I'll say it. It's nowhere in his formal bio, but he's one of Mellon's big thinkers. He's a fellow just as much at home in the forest as he is in the trees. He's a graduate at Johns Hopkins, he majored in political science. He spent time at BlackRock, Sonian Capital, Fidelity. He also happens to be a millennial, and in keeping with stereotypes, a serious foodie. So we expect plenty of reference to aromatic bone broths, esoteric sauces, and all the kinds of cooking that has flowered during this pandemic.
Rafe: And I will also mention just lastly that we initially recorded an interview with Nick on this very topic right before the pandemic hit. And had to shelve it because well, the entire world has basically changed since then. So, let's hear how his answers may have changed in this intervening time. Nick, welcome.
Nick Cohn: Thank you guys, thanks for having me. I guess I'll start by giving us all a collective pat on the back, and this is completely unaccountable to any of our listeners. But we got a lot of stuff right, even given that there is a pandemic, so. We'll go in depth in a lot of the forecast that we have for the housing market, and how millennials are going to be similar and different to the generations that preceded them as they age.
Nick: I will just share a funny little tidbit from our first recording. Rafe actually asked if all the new teleworking tools would allow for people to live further from their physical workplaces? He asked this in January 2020, and I said, "Yeah, I mean sure that sounds good." But there's absolutely no data to support that, so we probably shouldn't even talk about the context of that.
Rafe: Just call me Nostradamus and I'll be going out to buy Lottery tickets after this interview.
Nick: Yeah, the intervening three months have given us a little bit of data to suggest there might have been something to that theory. But glad to be here, glad to be back. And yeah, this is a great topic, because there are a lot of things that have changed from the first time we talked about this together. But there's a lot of things that haven't, and the trends we were predicting would emerge have emerged, and might be even more enduring than we initially thought. So thanks for having me.
Jack: Really cool, really excited to revisit this, even in this context, or perhaps even more so. Now Nick, I know that you heard the comments of our preceding guest, Rick Fry. He says the $64,000 question as we examine the ascendants of the millennials is, "Will they ultimately settle down, buy a house, make a family? Or are they somehow doomed to dwell perpetually in crammed urban confines with roomies? So now let's feather into that question the added complexity of a pandemic, which resulted obviously in hundreds of millions of Americans locked down in their living rooms. Be they on sprawling ranches or crammed condos, they may not ever return to the office, thus redrawing the very confines of where they can live. How do you think about the future of homeownership for millennials, and does the pandemic accelerate or alter any of your predictions?
Nick: Great questions. So, prior to the pandemic I would have said people are over extrapolating life stage differences into generational differences. And that they are assuming that because millennials currently live very differently from Gen Xers and Baby boomers, they concentrate in urban cores, they live in smaller apartments with more people, that's how they always want to live. And I think the evidence suggest that as millennials age they start to more like we imagine Gen Xers and Baby boomers, and so I was already predicting that suburbs and exurbs would be net beneficiaries of these trends. And that entry level single family housing would be one of the hottest consumer durable industries or sub-industries as these demographic trends manifested in very strong housing demand this year and kind of into the mid to late 2020s based on age groups.
Nick: We never get to see if I would have been right anyways. But, we can clearly say that those things are happening strongly as a reaction to COVID-19. The housing market is incredibly strong, especially given the drop in general consumer confidence. Suburbs and exurbs are disproportionally seeing demand and the strongest segment anecdotally is the sub $500,000 entry level single family house.
Nick: I think this is an acceleration of what would have happened anyways, and as a result I think this is more sustainable than some other people might. Though, I will caution that a number of consumer durable categories, boats, RVs, that are expressions of people wanting more space are seeing a cyclically strong demand right now. That probably is not a full secular change, unless we are currently living the new normal. And that's not a question for me, I can just say as somebody who thinks about stuff like this, I think it's difficult to say with any certainty right now. And I think you have that assume that broad distribution possibilities are in play.
Rafe: Nick, how do you reconcile this really strong housing market with unemployment levels that haven't preached these heights or depths since The Great Depression, well beyond what we saw during the great recession little over 10 years ago. You've got loan forbearances ticking up pretty dramatically. You've got a lot of late rent payments out there. How can these two things co-exist?
Nick: So that's a great question. And I will author a couple reasons. But I'm not sure that I've completely connected all the dots in that I am not confident that all of the strength we are seeing right now is sustainable in the near-term. I am confident that it is sustainable in the medium kind of three to five year term. It doesn't look like an overshoot. But COVID has made near-term economic forecasting really difficult.
Nick: So, the first and kind of saddest part of answer to your question is, a lot of the unemployment that we are seeing is at kind of the lowest wage levels where people probably weren't going to be buying houses anyways. We haven't yet fully seen the economic damage of COVID cascade into the middle class yet. We have a little bit, but it is a very open question as to whether the economy and society recovers quickly enough such that the damage doesn't really cascade into the middle class. So, if you think about the industries that have been disproportionately hit with job losses, food service for example. Those are industries that have a lot of renters rather than buyers among their employees.
Nick: Now, it's unequivocally a bad thing to have so many productive Americans out of work. It's beyond economically, it's morally a problem. But it won't necessarily have the headline effect, the effect on the housing market that you'd expect from the headlines. Another thing is that people, and I'm trying to be careful with my language here. Both the workforce and employers and the government seem to be thinking about a lot of this unemployment as temporary. You've seen big unemployment spikes. Not quite this big, but you've seen big unemployment spikes locally around disasters. We've separately talked about kind of the experience of some of the gulf coast states around Perky and Katrina. And you see temporary unemployment spikes and then reasonably quick returns to previous trend.
Nick: And purchase behavior actually doesn't get that affected by unemployment that is viewed as temporary. I honestly do not know how temporary a lot of this unemployment will prove to be. And I think it's a very important question for things much more important than the housing market. But I will say that purchase behavior for certain consumer durables more closely looks like what people would do with temporary rather than permanent unemployment.
Nick: You also have a genuinely and generally effective government stimulus program, or series of government stimulus programs that have given people a little bit of extra spending money. Obviously it's not really the difference between having a house and not, but it cascades to the economy and leaves us at higher consumer confidence levels than you'd otherwise expect.
Nick: Similarly, the wealth effect from the stock market does genuinely have an effect on people's purchase behavior. Not the average person, but at the margins that matters. And then on top of that, I was alluding to it earlier, but let me say it more explicitly. There is some meaningful spike and demand from people wanting space of their own. You see it with houses, you see it with boats, you see it with RVs. Now, the housing market is so big that I just don't think that's all of it. But that's certainly affecting the numbers, and far be it from me to tell you exactly how much that is or how long it's going to continue to be a tail end to housing demand.
Nick: What I can say though is, housing demand is incredibly strong right now. Mortgage purchase applications for the June 17th release just came out at an all time ... Not all time, at a 11 year high. And pricing almost everywhere for houses is up year over year. It's a very strong market, not just strong for COVID.
Jack: So, Nick, the counter narrative out there, at least until the pandemic was that you have a generation of young adults who grew up watching the family home get foreclosed on during The Great Recession. So there's a lot of scar tissue there. And now they are loathed to sink capital into a house only to potentially lose their equity investment. It sounds like you don't quite buy that, or that there's more to say there.
Nick: You're right. I don't quite buy that. The millennials are, let me say this as a millennial. Millennials are not the unluckiest generation in history. I've seen that meme floating around a little bit, and it's just wrong. I mean, this is pretty much every generation has dealt with some amount of hardship, and in many cases more significant hardship than we have. I think we've had our struggles, and I think you can use those struggles to create some narratives about ways in which millennials are different. But I think when you dig into the data, the data don't really support some of the most popular narratives.
Nick: For example, if you look at, this is pre-COVID, gaps to historical homeownership rates among wealthy Americans and poor Americans. Poor Americans, while they own homes at lesser rates than wealthy Americans, actually own homes at similar rates to what they did previously in history. It's wealthy Americans who are really undershooting the historical aboriginal homeownership. So, I don't buy the narrative that millennials can't purchase homes or are just so economically damaged by the great financial crisis, we'll see about COVID, that they are stunted relative to previous generations and their ability to purchase.
Nick: It seems to be more of an issue of choice, and I think this shows up ... Some of the stronger narratives show up in some of the data around, for example childbirth. Millennial women are choosing to have children later than other generations, and this is a traditional trigger towards buying a house. Either having a child or preparing to have a child. And so I think that gives a little more credence to the idea that millennials look like other generations with a little bit of a lag.
Nick: I guess the final point I'd make is, millennials aren't ultimately that different from other generations in how they spend their money at various stages of life. I've done a lot of research on changes in purchase behavior by age cohorts, changes in headships or the propensity to head your own household by age cohort. And millennials kind of behave a little bit in the direction of each of the popular narratives about how they're different. But just the magnitude of difference isn't that great.
Rafe: Nick, the after effects of the killing of George Floyd on a street in Minneapolis, I don't think we really know what the full impact of that is going to be. But I believe regardless of that, that the second quarter of 2020 will forever be remembered as a time of civil strive. I mean, the most in the United States since the 1960s riots that followed the assassination of Dr. Martin Luther King Jr. Those riots led largely I think, I think they were probably the main catalyst to the so-called white flight movement to the suburbs when a lot of white middle class city dwellers left.
Rafe: This time around you do have crowds in the street that are largely peaceful. There have been some instances of violence, looting, rioting. What's your take? I mean, is there a chance that we're going to have another flight from the city because of what's been going on?
Nick: So I think there's a lot to unpack with that question, and I'll do my best to answer it, but I don't think I'm capable of answering it fully, and I don't know that anybody is right now. I think there is a popular narrative that the late 60s riots explain white flight. But I don't particularly subscribe to that. I think the suburbanization of America is what I will call it, was a more continuous trend than that point narrative gives it credit for. And the, I guess we can call white flight and regentrification of American cities pretty closely mirrors urban crime rates broadly and certainly specifically in various city.
Nick: So, I don't buy the idea that specific outbreaks of unrest cause big migrations, and one of counterfactuals is, you can look at some of the really disruptive riots in the early 90s in Los Angeles, but they happened at the beginning of a trend of kind of regentrification of Los Angeles and other cities and didn't really have much of an effect. If my narrative about urban crime rates generally, not specifically in any instances, affecting whether people who can afford to live elsewhere want to live elsewhere. If that's true, we are really so far away from any of the historic levels that we saw in the 70s, 80s, and the early 90s, and even early 2000s that prompted people with means to leave the city in the first place.
Nick: So, could we be at the start of some generational change in urban safety and people's perception of how desirable it is to live in a city because of unrest. Maybe I just don't see it, and I don't know, I think it's a lot to infer that from a few weeks of very peaceful protest with broad social support. I just don't see that.
Nick: I think the more interesting question or maybe the more powerful question is, what does COVID and its after effects do to the desire of people with means to live in cities? And I honestly don't know. You have a huge price per square foot premium in top 15 urban cores, and certainly in specific neighborhoods. And theoretically that is predicated on a number of things that may not persist. So, it's predicated on kind of cultural agglomeration benefits, cool restaurants and bars. It is predicated on access to local job markets that are higher paying than other non-local job markets.
Nick: And to a lesser extent it's predicated on a huge block of wealthy 20 somethings. And that's the millennials, and kind of all three of those things are at risk. I mean, I can tell you the millennials are going into their 30s, and we'll see if they still have the same taste in their 30s as they did in their 20s. I suspect they will opt for more suburban living. It remains to be seen how permanent telework is and how accepted telework is, especially for some of the highest paying jobs in the country.
Nick: I don't know how that will end up, but I will tell you that if telework becomes a permanent feature, and does not disadvantage employees, that will reduce the real estate premium that some of these cities and neighborhood have enjoyed, and will benefit the suburbs. And finally I think it's difficult to tell how powerful in the very near term some of the storefront cultures in these cities will be, given that that's been the hardest hit part of the economy. So, I do think it is very likely that people were going to see more strength in the suburbs, exurbs, and kind of non top 15 cities. We're already seeing it, Zillow, Redfin, and we have a lot of great real estate data who have already highlighted the extent to which search activity have moved outside of the traditional cores in kind of the last two months.
Nick: But until we know what's going to happen with restaurants and bars and other cultural institutions, and until we know what's going to happen with white collar work from home culture, I think it's really difficult to say how dramatic the shift from expensive cities to suburbs, exurbs, even rural living is going to be.
Jack: Nick, can you tell us more about the differences as you found them between millennials and other generations in terms of how they buy a house, how they buy it. Do they prefer turnkey pristine homes or fixer uppers, are they looking for smaller struggler houses or Mcmansions. Should we also expect home builders to start installing 1,000 gallon hand sanitizer dispensers at the front door?
Nick: So a lot of great questions in there. I don't have all the answers, and frankly neither does the home building industry. I think a lot of different home builders who really are the people to answer this question, because they are the ones who build new houses, or houses that can be built. They can really define the live space in more of a way than anybody else who touches the real estate environment can.
Nick: I don't think they have an answer. I mean, some of them are definitely taking an approach of attacking the kind of renter by choice market, which is to say relatively wealthy millennials who haven't bought a home yet. But are used to living in really nice well outfitted inner city apartments, and are looking for similarly nice features in their first home. So, these people want to be close to transit, close to a vibrant bar and restaurant scene. And they want all the nice finishes, so that's where a lot of their kind of extra money in the home goes to.
Nick: That said, you have many millennials who really want affordability, and so you have other home builders who are really just trying to get that unit cost down to standardization and giving good but not top of the line fit and finish. But just doing it quickly and allowing people to almost make that impulse purchase to get in their first home.
Nick: I think in two or three years the industry and researchers like myself will have a much better sense of exactly what housing tropes satisfy this market demand, but we're really at the beginning of this group and this group's taste and all the sub groups within it starting to dominate the housing market. They really haven't been an active force in the market for pretty much this entire housing up cycle until last year.
Nick: So, consumers are still figuring out what they want, and the housing industry is still figuring out how best to serve them. I will say on how to buy a home. I believe there is a lot of with luck to shop with, making the house purchase process more similar and to the other relatively frictionless consumer purchase prices is that this generation and especially younger generations are used to.
Nick: A lot of technology first providers of real estate services have really been attacking real estate services as kind of the last frictional market for consumers, and getting a lot of traction doing so. And it's my view and kind of the result of my research. I think they're going to continue to have success. The housing market has been driven for years by the purchase habits of larger Baby boomers, just because Generation X is a relatively small generation.
Nick: And now as leadership is being handed over to millennials, I think it's a competitive necessity to remove frictions from the process and let millennials buy houses the way they're used to buying a lot of other things. And young consumers and other I should mention, we're not really talking about genuinely young consumers, we're talking about 30 and 35-year-olds at this point in a lot of cases. But these people have shown time and time again throughout the last 10 years that they will surprise you with how significant approaches they're willing to make on ... Largely without human contact as part of the process. And many of them even prefer it that way, so. I think there's still great awards available for real estate services competitors who really crack the nut of making this a frictionless process for younger consumers.
Rafe: Okay. Nick, I saw a really eye popping figure just today as a matter of fact, which showed that Baby boomers and the aggregate have a net worth of 76 trillion dollars. And millennials have five trillion. And that said to me that at some point in the coming decade or so I would assume there's going to be a large transfer of wealth from these Baby boomers, presumably to their kids or grandkids, maybe just some philanthropic causes, but I'm assuming the millennials are going to have quite a bit more money at some point. And I'm wondering how you think about what the impact of that could be, and if that presumption is even correct?
Nick: So that's a really good question. I haven't done enough work on exactly how that wealth is distributed to know what effect that is going to have on the median millennial, or even kind of the top 20th percentile millennial. It may or may not have a large effect, I would have to do that work before I feel comfortable commenting. I think one thing that I have done a lot of work on and I do feel comfortable commentating on is, millennials are going to be spending more money, partly because they're going to be having more money. Even regardless of intergenerational wealth transfers they are entering their peak earning years. But they're also entering peak spending years. And so as the demographic, we've talked a lot about how the demographic bulge of millennials is going to be a large tail end for the housing market in the coming years. But it's going to be a large tail end for a number of other categories as well.
Nick: So I think you can safely say that anything you expect 35-year-olds to be spending a lot of money on, assume there will be more 35-year-olds, and also assume that they will have more resources to spend at 35 than they do now in their 30s. And sorry, what was the other part of that question?
Rafe: Oh, it was just whether the presumption is even correct that the millennials are actually going to get their hands on that money? I don't know about longevity and whether the Baby boomers are going to live significantly longer if their life philosophy is to spend it all on Maseratis and second and third homes instead of giving it to their kids and grandkids.
Nick: So your second question is to whether one should even assume an intergenerational wealth transfer in the coming years. It is a good one. I'm not sure I have a complete answer, but I will say, generally when looking at behaviors associated with older age or ... Let me say, behaviors associated with older ages, the Boomer generation has consistently surprised to how long they do the middle age thing, and how late they start doing the old age thing. Somewhere where we talked where that gotten a lot of scrutiny is working. Boomers are staying in the workforce for a longer time than you might otherwise expect for various reasons.
Nick: And they are certainly ... They have been supporting the housing market a little longer, and forming new households a little longer than you would have expected, giving previous generations. Now, I think it's a little too morbid, and I certainly don't have any data to speculate whether that extends to dying or giving money to younger generations. But Boomers have definitely had a lot of longevity in other areas that economists have analyzed, and I think a lot of energy is spent on trying to figure out how millennials are different from the generations that preceded them. Honestly I mean, Boomers differences from the generations that preceded them are or may be just as interesting.
Jack: I think we've covered a lot. And it's been fascinating to hear your insights. When we talk, wrapping it up here. Generally speaking, how are you thinking about putting your money to work in the markets, based on all these various demographic thesis that you've had and that you've expanded upon?
Nick: So it's an interesting question. Generally speaking I think the market over extrapolates life stage differences into generational differences. And so a lot of categories that are dependent on the spending patterns of 35-year-olds to 45-year-olds have had a rough go at it over the last cycle. And I think the market is over extrapolating that into the next cycle. So, I'll highlight single family housing, especially entry level single family housing as a category that will do much better than market consensus expects over the next five to 10 years.
Nick: Demographics will go from being a pretty significant headwind to a very significant tail end. And I still think there's opportunity for consensus to come around to that understanding.
Jack: Right, the sense being that don't interpret what may be very well delayed spending decisions that we would have expected of people that are the age of millennials as some kind of choice that they've made to consciously avoid that choice altogether. It's not like you said something that is at the core of who they are as much as it may be coming later than the market had reason to expect.
Nick: I'd actually go a step further and say, I don't think, with the exception of choosing when to have children I don't think millennials are delaying home purchases and other patterns of consumption that much. I think there is much more ink spilled on the topic than is deserved. I think largely what you're seeing is you are looking back on an upcycle, and here I'm talking about kind of 2009 to the present, dominated by the spending habits of people in their 60s and people in their 20s.
Nick: And I think the market and participants in the market learn a lot of weird lessons about what consumption look like when those are the two dominant groups. And we're going to move into a new decade where consumption is dominated by people in their 30s. And I think some categories, and again, I'll highlight single family housing here. Some categories will look a lot more attractive when viewed in that light, and I don't think it's so much an issue of delay, although there is definitely some delay in consumption among millennials. I think it's mostly just, you haven't had a lot 30-year-olds and you got to a lot of 30-year-olds.
Jack: Something to look forward to perhaps. Well, thank you, it's been great to have you. Thanks so much for your insights here on Double Take. And I'm sure we'll be catching up again some point down the road.
Nick: Great. Thank you so much guys.
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