Housing Market Is Supercharging Retirement Readiness for Millennial Homeowners

The housing market these days is giving off A Tale of Two Cities vibes.

The national median home price is projected to hit $1 million by 2050, just as millennials reach the traditional retirement age, according to a new report from the National Association of Realtors. That’s tremendous news for the tens of millions of millennials who are already homeowners, as upward pressure on housing prices will make their homes valuable assets in the retirement planning equation. Renters face a different outlook, however, with many feeling priced out of residential real estate. While home ownership is still a part of the American Dream for them, they may be better off relying on long-term stock market participation to gear up for retirement. 

It’s an interesting new dynamic that could help advisors better forecast their clients’ retirement readiness. 

A Generation Divided 

The millennial generation is not monolithic, however, and older members are benefiting from the housing price inflation trend, while younger ones are suffering, said Jessica Lautz, deputy chief economist at the National Association of Realtors. “This generation is 27 to 45 years old,” she said. “That’s a big span, and older millennials and younger millennials are not behaving the same in the housing market.”

Association data shows older millennials (ages 36 to 45) are leveraging existing equity to become move-up buyers: 

• They had a high median household income of $132,700. 
• They bought the largest homes with a median of 2,100 square feet, and were far less likely to be first-time buyers.

Younger millennials who don’t own homes face a far different reality. Starter homes, defined as those worth a third of the median local property value, now cost at least $1 million in a record 242 cities, per Zillow. The number of cities with million-dollar starter homes has nearly tripled since February 2020, highlighting how pandemic-era housing pressures continue to reshape affordability across the country. While the typical starter home nationwide is still worth $198,649, million-dollar entry-level homes are spreading well beyond traditional high-cost coastal markets.

Stick With Stocks? For financial advisors helping millennial renters think ahead to retirement, it’s worth asking tough questions about buying into a red-hot real estate market. From a pure mathematical standpoint, research from the Association for Financial Counseling and Planning Education shows, renting is the financially optimal decision. The logic is driven by two factors. First, the costs of homeownership are significant, including transaction costs, property taxes and maintenance. 

Second and even more significant, the opportunity costs of homeownership are enormous. Money used for a down payment and mortgage (above what would have been spent on rent) could have been invested elsewhere. Consequently, any analysis of the financial implications of homeownership must compare the expected return of a house to the expected return of other investments, most notably stocks. In practically all backtested scenarios, money invested in broad stock indices has a far greater return.

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