The American dream of buying a home is alive and well for millennials, but the generation of 18-36 year-olds must overcome hurdles to home ownership that older cohorts didn't face when buying their first home. The challenges of home ownership for older segments of Gen Y are rooted in economic circumstance, but are bolstered by the cultural influence of consumerism they witnessed during their formative years.

Leading up to the recession, mortgage lending institutions were in their heyday—looser lending conditions allowed Americans to borrow to buy homes, while using the equity in their homes as a piggy bank for other spending. As home prices continued to appreciate (with no end in sight), more people saw value in buying bigger homes, second homes, or making major renovations. This period gave birth to McMansions, in their ostentatious glory, which have since become a somber symbol of frivolity and living beyond one's means. Millennial's front row seat to pre-recession consumerism, as well as its fallout, creates a complex tug of war between the preferences they have for their first home, and the reality of what is affordable.

It can be argued that the high standards Millennials have for a first home are justified—as children, millennials had a fairly extravagant upbringing compared to other generations. The 'buy now pay later' ideology (combined with technological advances) during their formative years led to a lush life full of iPhones, vacations, laptops, and whatever the current fad was (Beanie Babies, Pokemon, and the like). However, long-term ramifications of the downturn have left and will continue to leave an indelible mark on the way Millennials live in the future. Disposable income of millennials is growing at a significantly slower rate compared to that of older generations, and the amount of debt they face from student loans far exceeds the amount past generations faced in their mid-20s and 30s. According to the National Association of Realtors' (NAR) 2017 Home Buyer and Generational Trends Report, the vast majority of millennial buyers reported that student loan debt was the biggest impediment to saving enough money for a down payment on a home. Among home buyers aged 36 and younger, 46% had student loan debt with a median loan balance of $25,000.

A recent study from the Federal Reserve Bank of New York establishes a direct tie between the burden of higher education costs and household formation—Millennials are entering the market at a slower rate than their counterparts. A silver lining is that there are millennials out there buying homes, despite the lag in pace. NAR's 2017 study marks the fourth consecutive year that Millennials account for the largest share of home buyers (albeit by a slim margin of 34%). However, Millennial buyers must compromise home features they prefer to afford entering the market--and still finance a whopping median of 93% of their home purchase with a mortgage.

In the past year, the most significant compromises buyers age 36 and younger made during a home purchase involved home price (24%), home size (24%) and home condition (20%). These three factors highly influence one another, and underscore the generation's preference to buy a new home over resale. For the majority of Millennial buyers surveyed by NAR (48%), the reasoning behind this preference is to avoid expenses in the future via the need for renovations or problems with plumbing and electricity. Despite the impression that Millennials will happily empty their pockets for avocado toast at Sunday brunch, this is a practical and fiscally responsible reason to purchase a new home. However, the second most common reason—the ability to choose and customize design features—once again points to the underlying importance Millennials place on having the "latest and greatest." There is a subtext in that sentiment that deserves consideration however, as many Millennials are waiting until their 30s to buy homes due to unprecedented price growth (the latest S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index hit yet another all-time high) and the burden of debt, while prior generations were able to start building equity at a much younger age.

New detached home inventory that falls within the budget of millennials is next to non existent in many major markets, and the tight squeeze on resale inventory has made prices more competitive for all buyer segments. Despite the preference for a new home, 89% of Gen Y purchased a previously owned home last year. The majority (27%) of homes they purchased were built between 1961 and 1968, which, although good news for remodelers, is skewing older than previous years.

Detached single-family homes continue to be the most popular product type among prospective home buyers across all generations. Not surprisingly, the share of buyers purchasing new homes increases with age, as they're more capable of affording the investment. However, as detached resale inventory tightens, it could become more difficult for Millennials willing to compromise and buy previously owned homes to compete with older buyers. Low supply is making it easy for older buyers to outbid younger buyers in the resale market (if younger buyers aren't already priced out, that is), and that can be seen in median year built data by generation. Across all generations, resale homes sold last year were older than previous years, with the typical home being built in 1991. The median home purchased by Millennials was built in 1984, for buyers age 37-51 the median was 1994, for buyers age 62-70 the median was 1998, and for buyers over age 71 the median was 1999.

The window for millennials willing to compromise and buy resale could be closing in competitive markets like Dallas, Austin, Salt Lake City, and Seattle, making the need for new, detached entry-level homes urgent. Millennial demand for new homes is there, but builders have been unable to capture this highly opportune demographic. High land development costs, a lack of affordable labor, and regulatory burden (which according to testimony from the National Association of Home Builders' in Congress last Spring can add 25 percent to the cost of building a home) are making it nearly impossible to build entry-level product and still turn a profit.

Taking a look at the median size of detached new homes sold illustrates the slow progress being made to develop product Millennials can afford. The median size of detached single-family homes rose between 2009 and 2014 (a pattern consistent with past cycles) as builders banked on selling move-up and luxury home product to home buyers with bigger budgets. According to NAHB Chief Economist Rob Dietz, "this pattern was exacerbated during the current business cycle due to market weakness among first-time home buyers." The latest annual Characteristics of New Housing data released by the United States Census Bureau shows that the national median size of detached single-family homes sold has been trending down since 2015, but relative to median price per square foot, 2016's median size of 2,567 square-feet is still out of the price range of many millennials.

In 2016, Millennials surpassed Baby Boomers as the nation's largest living generation, and within the next five years, 66% of Gen Y'ers plan to purchase a new home. Affordability is at the heart of the problem, but it's also possible that Millennial household formation is lagging due to an unwillingness to compromise their idealized version of a new home. Builders should feel pressure to devise ways to provide affordable, detached single-family homes as resale inventory tightens and Millennials are priced out of both markets, despite their willingness to compromise not. Although home builders face the onerous task of finding a cost-effective solution to capture the demographic, Millennials should be feeling pressure to enter the market as well. The reality of our current economic climate indicates that there could be more danger for prospective Millennial homebuyers to play the waiting game while builders devise ways to check most of the items on their wishlist. Current mortgage interest rates remain favorable for home buyers but are expected to rise, and as the supply of previously-owned detached homes for sale tightens, Millennials risk having to wait even longer if they delay until builders bring a version of their ideal home to market at a price they can afford.