Real Estate Research


Real Estate Research provides analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog include the Atlanta Fed's Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.

September 17, 2015

Do Millennials Prefer to Live Closer to the City Center?

In past posts (Part 1 and Part 2), we examined whether millennials were driving the decline in first-time homebuyers. We concluded that, if anything, first-time homebuyers were becoming younger over time and location and economic conditions appeared to be a much stronger predictor of declines than a generational divide. In this post, we look into whether millennials prefer to live close to the city core or in the suburbs. Where millennials settle could determine whether our cities continue to grow, what our transportation infrastructure expenditures should be, and whether homebuilders should focus their efforts on multifamily housing in urban locations or traditional single-family homes in the suburbs.

This question has received a fair amount of attention—see here, here, here, and here. A number of observers have speculated whether the recent surge in millennials living in cities represents a change in preferences or whether it's simply an artifact of financial constraints—tighter underwriting standards, weak income growth, or larger student debt. Nielsen's survey of young adults finds that millennials prefer the lifestyle afforded by dense urban environments, but the National Association of Homebuilder's survey of young homebuyers finds that just 10 percent would prefer to live in the city while a whopping 66 percent want to live in the suburbs. Setting preferences aside, others debate whether millennials really are moving to the city. While recent data confirm that young people are moving to the cities at much higher rates than in the 1990s, it's also true that the raw majority of young people choose the suburbs over the city.

This research on young adults tends to combine renters and homeowners in one category. Renters tend to experience credit and financial barriers to location, and are limited in their location choice by the distribution of rental housing stock. That can make it difficult to distinguish whether young people who move to the city do so because they prefer urban life or because there is more rental housing stock in the city than in the suburbs. To shed light on the question of where millennials prefer to live, we segment out a group of young adults who experience relatively fewer restrictions on where to live: first-time homebuyers. Our data set allows us to identify first-time millennial homebuyers and the census tracts where they bought their first homes (a previous post describes the data).

Using this data, we ask if first-time millennial homebuyers are more likely to live near the city center than either existing homeowners or older first-time homebuyers. Finally, we look at how other factors like creditworthiness and student debt levels appear to influence this decision.

Below, we chart the median distance from the central business district (CBD) of first-time and existing homeowners by age bracket from the years 2001 to 2014. We find that existing homeowners tend to live, on average, 6.3 to 6.5 miles from the city center. First-time homebuyers tend to live closer in regardless of age, on average 5.8 to 5.9 miles away from the city center. Beginning in 2003, younger first-time homebuyers trended towards more central locations. During the 2007–09 recession, the spread between older and younger first-time homebuyers collapsed. After the recession, the spread widened again. It's difficult to say whether the shift in purchase patterns is the result of financial constraints or changing preferences, but the tendency appears to be for newer and younger homeowners to purchase homes closer to the city center.


What this chart cannot tell us is whether the trend that has younger people living closer to the city center reflects uniform preferences or whether this is an artifact of stronger economic growth in denser cities. In other words, is this trend the result of strong home buying in compact cities and weak sales in sprawling metropolises (that is, between cities), or is it the result of all buyers nationwide choosing to move closer to the city center (that is, within cities)?

To further investigate whether millennials prefer to live close to the city center, we perform several regressions to see how age relates to first-time homebuyer location decisions before and after the crisis. We control for a few key variables—namely, credit score, mortgage size, and student debt levels. The sample includes first-time homebuyers aged 18–60 who chose to purchase homes in the 50 largest metropolitan statistical areas (MSA) in the United States. We calculate distance by matching the census tract variable in the Federal Reserve Bank of New York Consumer Credit Panel with census tract data on distance from city center provided by CityObservatory.

Because some cities are more compact than others, we add MSA-level fixed effects. To control for the influence of nationwide effects such as the introduction of quantitative easing and the first-time homebuyer tax credit, we control for year-fixed effects as well in each regression. These controls should adjust for all region and time invariant factors that might affect both the age and location choice of home purchases.

Since creditworthiness typically increases with age and households with higher credit scores tend to be less constrained in their location choice, we also add a risk score variable to see whether age is simply a proxy for the ability to borrow. Similarly, we include mortgage balances. Finally, we add student debt balances to see whether the higher student debt burdens of young people can explain the discrepancy between the location choices of older and younger buyers.

The results are featured in the table below. On the right side of the table—from 2001–05 (that is, before the housing market crisis)—age appeared to have had a small impact on location and was not significant. Other factors such as size of mortgage and amount of student debt seemed to be larger determinants of location. Homebuyers with larger mortgages and with more student debt were more likely to live farther from the city center.

On the left side of the table—from 2006 to 2014 (that is, during and after the housing crisis)—age appeared to have had a small but significant relationship with location. Buyers who were one standard deviation younger located 0.03 standard deviations closer to the city center. With more controls included in the regression, this relationship declined to 0.02 standard deviations closer to the city center.

During and after the crisis, risk score became a stronger determinant of location as well. As risk scores increased by one standard deviation, buyers moved closer to the city center by 0.04 to 0.03 standard deviations, depending on the specification. This suggests that credit-constrained homebuyers are more likely to live father away from the city center and that, all else equal, younger homebuyers prefer to live closer to the city center.


While it appears that, on average, younger homebuyers prefer to live closer to the city center, can we say this reflects a preference for urban life? The average distance from city center—five-and-a-half miles—could very well describe areas with moderate density and single-family housing stock in moderate-sized cities. To focus on whether younger homebuyers are interested in living in the central city, we repeat these results using a logistic regression predicting the likelihood a first-time homebuyer will purchase within one mile of the city center. Controlling for all available factors, we find that younger buyers are significantly more likely to live in the heart of downtown. For each additional year, the odds that a buyer will decide to live within one mile of the city center drop by 6 percent.

By using this unique data set, we hope that we have shed some additional light on the age and location decisions of first-time homebuyers. Our interpretation of the data suggests that first-time homebuyers became more likely to buy closer to the city center during and after the housing market crisis and that young homeowners (first-time and existing) are more likely to live closer to the city center than older homeowners. Moreover, creditworthiness, total mortgage balance, and student debt loads appear to matter when the time comes to decide where to buy. In short, although age may not affect whether someone buys a house, our analysis suggests it may influence where they buy.

Photo of Elora RaymondBy Elora Raymond, graduate research assistant, Center for Real Estate Analytics in the Atlanta Fed's research department, and doctoral student, School of City and Regional Planning at the Georgia Institute of Technology, and

Photo of Jessica DillJessica Dill, economic policy analysis specialist in the Atlanta Fed's research department

September 17, 2015 in Housing crisis | Permalink | Comments (0)

August 27, 2015

The Multifamily Market: Is a Hot Market Overheating?

Moody's/RCA National commercial property price index, which is based on repeat-sales transactions, has risen 36 percent over the past two years. Such increases in commercial real estate (CRE) prices have raised concerns that the market is overheating (see here). Multifamily is one CRE property type that for a couple of years has been attracting a great deal of lender interest and thus growing concern regarding potential overheating (see here).

Looking around Midtown Atlanta, it is easy to wonder if multifamily housing construction is getting ahead of itself. According to the Midtown Alliance, within just a 0.5-square-mile portion of Midtown Atlanta, 981 units have been recently delivered, 3,392 units are under construction and 4,732 are in various stages of planning. Dodge Pipeline reports that the entire Midtown/Five Points submarket has 4,865 units under way. For reference, peak activity in the Midtown/Five Points area from 2003 to 2007 was 4,636 units under construction with a total of 10,831 units completed. The question arises as to what extent are happenings in Midtown indicative of the broader market trend.

Yield spreads—the capitalization rate on recent apartment transactions (current rental income divided by sales price) minus the yield on Treasury bonds—serve as one indicator of optimism in a market. A narrow spread is consistent with reduced pricing for risk, which is associated with “frothiness.” According to Real Capital Analytics, apartment yield spreads in the second quarter of 2015 stood at 366 basis points (bps), which is around 250 bps higher than prerecession lows and in line with 2003–04 levels (see chart 1). So by this measure, apartment activity does not appear too frothy on a nationwide market basis.


Of course, yield spreads vary significantly by market area and by property type. Breaking the U.S. market into six major markets (Boston; New York; Washington, D.C.; Chicago; San Francisco; and Los Angeles) and all others reveals that the major markets have seen yield spreads fall relative to all other markets. (The major markets account for 36 percent of transaction dollars with New York and San Francisco alone accounting for 20 percent of the U.S. total.) Though shrinking during the last several quarters, the current 150 bps gap between the major and non-major markets is wider than at any time since 2002. One possible explanation is that the anticipated rent growth of the projects sold in the major markets is higher than in nonmajor markets.

So what to make of this? While multifamily markets have been active during the postrecession period, this activity is not necessarily unjustified. Given that the population of 20- to-34-year-olds will continue to grow, demographics point to greater demand for rental property (see chart 2). Supply has not yet shown signs of deteriorating fundamentals since vacancy rates have remained low as new product has been delivered, and rent growth has held steady (see chart 3).



How long will preferences for renting persist? How long can real rents continue to grow? How is this new activity being financed? If new projects are penciled out using unrealistic rent growth assumptions and demand falls, rent growth expectations won't be met and the projects may look overdone in retrospect. Regardless of whether current activity indicates overheating, it seems important to keep a close eye on demand.

Photo of Carl HudsonBy Carl Hudson, director for the Center for Real Estate Analytics in the Atlanta Fed's research department

August 27, 2015 in Housing boom, Housing demand | Permalink | Comments (0)

July 01, 2015

Are Millennials Responsible for the Decline in First-Time Home Purchases? Part 2

Recall that, in our last post, we investigated the claim that millennials were to blame for the decline in first-time home purchases. Our data analysis confirmed that home purchases by first-time buyers have indeed plummeted since the crisis. We did not, however, find evidence that millennials were driving this decline. We found that, if anything, first-time homebuyers have become younger since the crisis, not older. By contrast, location appeared to be a much stronger predictor of declines in first-time buying than age.

Notwithstanding, many commentators still believe that millennials are behind sluggish sales. In this post, we take a closer look at the timing of first-time home purchases and the credit trends of first-time homebuyers with an eye towards the changing composition of homebuyers. We use the same credit bureau data set that we used in the previous post (take a look for a description of the data and our definition of first-time homebuyer). Using this data, we dig a bit deeper into two theories that are often cited for why millennial homebuyers are not buying as many homes as in the past. We first analyze whether millennials delayed the purchase of their first home in response to the crisis. Then we investigate what role, if any, credit tightening has played.

In short, we can't confirm any delay in the timing of home purchases. What we do find is that the distribution of first-time home purchases changed after the crisis. First-time home purchases by younger buyers peak earlier and persist at an elevated level over a longer period of time than before. We also find, contrary to the popular theory that credit became too tight for millennials to buy homes, that mortgage credit actually became tighter for older first-time buyers than for younger first-time buyers. Taken together, we think these data observations help to explain why the median age of the first-time buyer shifted downwards (instead of upwards) after the housing downturn.


To examine how the housing downturn affected the timing of purchases by young first-time homebuyers, we separated this group out by birth year and examined the number of home purchases from 2000 to 2014. We looked at millennial homebuyers born in 1983 and 1985 and compared them to Gen X homebuyers born in 1975 and 1977.

Chart 1 shows the number of first-time home purchases for each year, with each line representing a different birth year. The time series for the older birth years peaks between the ages of 27 and 29 while the time series for the younger birth years peaks between the ages of 24 and 25. For Gen Xers who came of age before the crash, their peak appears to be the culmination of a steep increase in purchases and an almost equally steep decline resulting in a curve that looks roughly like an inverted V. For the millennial birth years, who came of age after the real estate crash, the peak in first-time purchases occurs earlier and the decline of the curve is much more gradual. The change in the distribution of purchases after the crash suggests that the younger first-time home buyers are still purchasing homes at relatively high rates, but purchases are spread out over a wider time period.


The distribution of millennial first-time homebuyers has clearly shifted. Not only has the distribution of first-time homebuyers become younger over time (refer to previous post) but first-time home buying among the most recent birth years is peaking at an earlier age. Why might this be? We think a closer look at credit trends can shed some light on this question.

Credit scores

In Chart 2, we examine the number of first-time home purchases and median credit scores of first-time home purchasers by age bracket. The two age brackets are adults under 35 years old and adults between the ages of 35 and 48. By grouping first-time home purchases into age brackets, we are able to examine whether credit is tighter for younger borrowers than for older borrowers using the median credit score as a proxy for credit tightness.1


From 2001 to 2014, median FICO scores increased by 5.0 percent for the younger group and 5.1 percent for the older group. In general, the median credit scores of both groups appear to behave similarly, except during the years when subprime lending prevailed. The median credit scores for both younger and older buyers shifted down between 2003 and 2006, signaling that there were more purchases by higher-risk buyers. With that said, the decline in the median credit score was more pronounced for older buyers (down 4.1 percent, from 689 in 2003 to 661 in 2006) than for younger buyers (down just 1.6 percent, from 693 in 2003 to 682 in 2006). Since the crisis, the gap between the median credit scores of younger and older buyers has closed (in other words, credit has become tighter for older buyers), which may explain why first-time home purchases have fallen faster for older buyers than it has for younger buyers. Indeed, between 2001 and 2014, first-time home purchases fell by 36 percent for younger homebuyers and by 54 percent for older buyers.

The table and Charts 3 and 4, below, delve deeper into the credit trends of younger and older first-time homebuyers, showing home purchases by credit bracket, year, and age. We determined credit brackets by taking the quartiles of every individual with a credit record in the time period. As the charts show, purchases by those with the lowest credit scores, marked in blue, have plummeted steeply. Credit scores in the middle, marked in green and orange, fell sharply, too, but particularly among older buyers. Older first-time homebuyers with moderate credit scores were much less likely to buy homes after than before the crisis, falling by 50 to 60 percent. Purchases by those with stellar credit, marked in purple, were barely affected by the crisis. Perhaps a more interesting observation is that young homebuyers in the highest credit bracket were the one subgroup to increase their purchases during and after the recession. First-time purchases by this group of young buyers actually rose by 25 percent.



We believe this collection of charts demonstrates in more detail that credit became tighter for older homebuyers during the crisis—and also that an uptick in home purchases by the most creditworthy millennials has buoyed purchases for that age bracket.

The Federal Reserve Bank of New York Consumer Credit Panel is an unusual data set in that it allows us to compare first-time homebuyers without first conditioning by age. By comparing older and younger first-time homebuyers, we have been able to examine the claim that millennial homebuyers are behind the stagnation in home sales. In addition to our earlier findings that first-time buyers have become younger, not older, since the crisis, we find that the distribution of first-time home purchases has changed since the housing downturn. Specifically, first-time purchases by younger buyers tend to peak at an earlier age and persist at an elevated level over a longer period of time. This is in contrast to the trend before the downturn, when first-time purchases by younger buyers peaked at an older age and dropped off precipitously after peaking. Moreover, the data reveal that, while younger and older first-time buyers have similar credit trends when tracked as the median credit score, credit may have loosened more for older first-time buyers than younger first-time homebuyers during the run-up and as a consequence tightened more for older buyers than younger buyers during the recovery, resulting in a lower number of first-time purchases by this older group. Despite the fact that many believe tight mortgage credit, student loan debt burdens, and stagnating wages have made it more difficult for millennials to buy homes, it appears that credit tightness has actually weighed more heavily on older first-time homebuyers.

Photo of Carl Hudson By Elora Raymond, graduate research assistant, Center for Real Estate Analytics in the Atlanta Fed's research department, and doctoral student, School of City and Regional Planning at the Georgia Institute of Technology, and

Photo of Jessica DillJessica Dill, economic policy analysis specialist in the Atlanta Fed's research department


1 Examining credit scores over time can be misleading. Credit scores measure a person's ranking of creditworthiness at a given time. A credit score does not give an absolute measure of someone's default probability, just where they are relative to others. So, someone with a 700 credit score in one time period may have a different default probability than someone in another time period, though their rank relative to others remains the same. This becomes relevant if the creditworthiness of the American public as a whole shifts dramatically over time

July 1, 2015 in Credit conditions, Financial crisis | Permalink | Comments (0)

May 20, 2015

Are Millennials Responsible for the Decline in First-Time Home Purchases?

First-time homebuyers play a critical role in the housing market because they allow existing homebuyers to sell their homes and trade up, triggering a cascade of home sales. While their share of all purchases has remained fairly flat over time (see our previous post on this topic), the number of first-time homebuyers has declined precipitously since the real estate crash. Many think of first-time homebuyers as younger households, and believe millennials are largely behind the decline in first-time homebuying. There are a variety of theories about why millennials have been slow to enter homeownership. One theory says that millennials would rather rent in dense urban areas where land is scarce than buy homes in the suburbs. Another theory blames steep increases in student debt for crowding out mortgage debt and reducing the homeownership opportunities of younger generations. Yet another theory argues that because the recession lowered incomes, younger people can't afford to buy. Finally, underwriting standards tightened after the recession, causing mortgage lenders to require larger down payments and higher credit scores in order to buy a home. Some worry that this more stringent lending environment has raised the bar too high for millennial homebuyers in particular.

We can't examine all these theories in a blog post, but we can examine the validity of the assumption that millennials are driving the decline in first-time homebuyers. We approached this from two angles. We first looked at whether the age distribution of first-time homebuyers has changed, and then we tried to discern patterns in first-time home buying across states. In general, we find that the age distribution of first-time homebuyers has become younger, not older, since the crisis. We also found that the dramatic fall in purchases varies much more strongly across states than by age. The preliminary figures suggest that housing market and local economic conditions may explain as much or more of the decline in first-time homebuyers than a generational divide.

Searching the data for first mortgages
Our analysis is based on the Federal Reserve Bank of New York Consumer Credit Panel. This data set provides longitudinal, individual data, using a 5 percent sample of all persons with a credit record and social security number in the United States.i We examined the age, location, and credit scores of people who bought homes for the first time and looked at how these characteristics changed after the crisis.ii

To identify first-time homebuyers, we flagged the first year of the oldest mortgage for each individual in the credit panel. This reveals the first instance of someone obtaining a mortgage, even if they subsequently buy another home or even transition back to renting. The trade-off is we were able to observe only those who use debt finance, and thereby excluded all cash purchases. While many homeowners do own their homes outright, we expect most first-time buyers and certainly most young buyers to have a mortgage.iii

Having isolated first-time homebuyers in this data set, we looked at their purchasing trends and demographic attributes from 2000 to 2014. In this data set, we found that roughly 1 percent to 2 percent of the population purchased a mortgage-financed home for the first time in a given year. Forty-nine percent to 53 percent had no mortgage (this category combines renters and those who own their homes outright), and 45 percent to 50 percent were paying down an existing mortgage.


Buyers aren't getting older
We found that the number of first-time home buyers fell precipitously after the crash, from 3.3 million a year to around 1.5 million to 1.8 million. However, the age distribution of these first-time homebuyers does not change dramatically, though the median age of actually went down slightly since the peak. If we were to believe that the decline in first-time buyers was driven primarily by younger workers requiring more time to amass a down payment or pay off student debts, then we would expect to see first-time buyers getting older.


We did not see a strong explanation for dramatic declines in first-time homebuyers when we compared younger and older adults. It doesn't appear that millennials are driving the decline. By comparison, when we reviewed the number of first-time home purchases by state, we found very dramatic differences that population alone cannot explain. Unsurprisingly, first-time homebuying fell further in places where the housing crisis hit the hardest.

The chart shows the number and percent change in first-time homebuyers from 2001 to 2011 by state. There is a wide variety in the percent change in first-time homebuyers, with declines as strong as 65 percent in some states and as low as 10 percent in others. North Dakota was the only state to have increases in first-time homebuyers, likely due to the oil industry growth there.

This analysis does have some weaknesses. For one, as we mentioned, it omits cash buyers, who are an increasingly important segment of the housing market, especially in hard-hit states like Georgia and Florida. Also, other research has shown that the transition from renter to owner and back can happen many times in a person's lifetime, and this data set does not control for homeownership "spells" older than one year (see Boehn and Schlottman 2008). Notwithstanding, this analysis suggests that the decline in first-time homebuying is driven not by swiftly changing preferences nor the economic constraints of the younger generation but by regional and local economic conditions. Stay tuned for more, as we plan to look further into how the real estate crisis altered the home purchase decisions of young first-time homebuyers relative to older generations.

Photo of Carl Hudson By Elora Raymond, graduate research assistant, Center for Real Estate Analytics in the Atlanta Fed's research department, and doctoral student, School of City and Regional Planning at the Georgia Institute of Technology, and

Photo of Jessica DillJessica Dill, economic policy analysis specialist in the Atlanta Fed's research department


i The data is a 2.5 percent sample of all individuals with a credit history in the United States. So, for example, this sample resulted in 636,638 records in 2014, which would correspond to an estimated 254,655,200 individuals with credit records and social security numbers in 2014.

ii We excluded anyone who had an older mortgage in a prior year. Doing so resulted in only a very small percentage of records being excluded.

iii Our approach and results are similar to those cited in Agarwal, Hu, and Huang (2014), who find that the homeownership rate between 1999 and 2012 varies between 44 percent and 47 percent for individuals aged 25—60 using a different time frame and age distribution of the same data set. Because our definition—and that of Agarwal, Hu, and Huang—is unique, it differs from the widely cited homeownership rate published by the U.S. Census Bureau. The rate published by the Census Bureau ranges between 65 and 68 percent for individuals over 25 years old and is calculated by dividing the number of owner-occupied households by the total number of occupied households. Homeownership rates have also been derived using other data. Gicheva and Thompson (2014) derive a homeownership rate using the Survey of Consumer Finance and find the mean homeownership rate to be 61 percent between 1995 and 2010. Gerardi, Rosen, and Willen (2007) used the Panel Survey of Income Dynamics (PSID), which tracks households over time and captures changes in tenure status, to identify home purchasers. They reported a range of 5.6 percent (in 1983) to 9.6 percent (in 1978) of households buying homes in the 1969—99 timeframe.

May 20, 2015 in Financial crisis, Homeownership, Housing boom, Housing crisis | Permalink | Comments (0)

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