The Great Recession comes for Millennials again
Millennials just can’t get out of the shadow of the Great Recession.
The 2008 housing crash led to a global financial crisis, triggering the worst economic downturn since the Great Depression. The economy cratered, and unemployment soared to 10 percent — just at the time many millennials were graduating college and entering the workforce. The recession was so deep that even though it technically ended in June 2009, the economy operated well below full potential for years more. Unemployment didn’t drop to five percent until 2016, marking over eight years of an economy nowhere close to full employment.
That took a permanent toll on millennials’ financial wellbeing. Some of those finishing college in the years after 2008 entered the workforce and tried to find a job, facing the prospect of either long-term unemployment or a sub-optimal entry level job at reduced wages. And starting out at a lower pay level amounts to essentially a permanent downshift in earnings that lasts through much of a person’s subsequent career.
Others tried to wait out the dire economy by seeking refuge in education. That meant taking on more student loan debt to go to grad school, making millennials the most debt-burdened generation in history, with the average millennial borrower saddled with nearly $40,000 in loan debt. So while some millennials gained extra education and avoided the worst of the recession, it came at a cost — shaving some $450 per month or more off their paychecks for the ensuing decade.
The recession’s combination of reduced earnings potential and higher student debt permanently altered millennials’ life trajectory for the worse. They waited longer to get married, have children, and buy a home. The Federal Reserve Bank of St. Louis worried that millennials had become a “lost generation” of wealth accumulation, finding that they had 34 percent less wealth than members of prior generations at the same age.
So for the decade after the Great Recession, millennials hunkered down, and made the best of a lukewarm economy. Meanwhile, because the Great Recession was triggered by a massive housing glut to feed rampant financial speculation, America dramatically lowered the number of new houses being built. This chart (from Paul Krugman, via the St. Louis Fed) shows the decade-long hangover in new housing construction that persisted after the 2008 housing crash:
The post-’08 grinding halt in housing construction has led directly to today’s housing market — one best described as wild, red-hot, or (if you’re the the Federal Reserve Bank of Dallas ) a “Brewing U.S. Housing Bubble.” And it’s also the housing market that millennials are coming of age in during their peak homebuying years.
Much of the heat is a result of the pandemic and the acceleration of young adults looking to move out of cities and buy homes. But it’s also a fundamental supply-demand mismatch. Because we haven’t built enough houses, too many buyers are chasing too few homes — a supply problem compounded by growing numbers of older adults opting to age in place, and potential sellers spooked by the prospect of having to attempt to buy in such an overheated market. So just as millennials are looking to buy homes and build wealth, the housing market is too hot for many to handle.
On top of the construction collapse after 2008, NIMBY restrictive zoning laws make it unduly hard to build new housing in the most economically vibrant metropolitan areas where more people are looking to live. American housing construction has not kept up with population growth, leaving us now short 3.8 million homes.
With the Federal Reserve beginning to increase interest rates, there are signs that the hot pandemic housing market is beginning to cool (albeit from red-hot to merely hot). Analysts have noted more home listings dropping their prices, and declines in the number of home tours and mortgage applications.
But the mechanism for cooling off the economy — increasing interest rates — functions by pricing more people out of the housing market. Making it more expensive to borrow will mean fewer people can afford to finance home purchases. That again means more people — especially first-time home-buying millennials — will be shut out from owning homes and gaining wealth.
We are attempting to stabilize the economy by reducing demand rather than increasing supply. That makes sense in the short term, given that rate increases can reduce economy-wide inflation a lot faster than new houses can go up to quell bidding wars. New home construction is ticking up, but may not make much of an immediate impact given material delays and supply chain issues for things like garage doors.
But in a country that strives to be an ownership society — one that has made home ownership the central pillar of middle-class economic security — it’s simply untenable to settle for stabilizing the economy on the backs of discouraged homebuyers and would-be wealth-builders. And it feels doubly inequitable that the losses will once again disproportionately fall on the millennial generation.
In the long term, we need to close our housing shortfall and make supply and demand meet by increasing supply. We need to build the 3.8 million missing homes. And we especially need to build entry-level homes suitable for first-time buyers. We were building more than 400,000 such homes each year by the end of the 1970s; in the 2010s, we built only 55,000 a year.
As Redfin’s chief economist Daryl Fairweather put it:
“If the Fed continues to raise interest rates, that could slow down demand because it makes buying a home more expensive, but that isn’t really making the housing market better. It just means that there are fewer people who can afford to buy … who can afford to borrow to buy a home. The only way to make the housing market better, meaning more affordable for everyone, is to build more … that really is the answer.”
How can we do that? A key distortion preventing supply from meeting demand in high-cost areas is clearly Big Government red tape at the local level: restrictive zoning laws that make it hard to get permits and start construction on new housing in metro areas around New York, San Francisco, and other growth areas. One silver-lining of the housing shortage could be that millennials are galvanized to advocate for more housing to be built.
The federal government also has a role. As the stewards of the national economy, the feds shouldn’t let local provincialism stall a more productive and dynamic American economy. Josh Barro has proposed a Race to the Top for Housing, modeled off of the Obama administration’s prize competition for states and localities adopting beneficial K-12 education reforms. The Biden administration proposed something similar as part of its American Jobs Plan: a competitive grant that would reward localities that take action to reform exclusionary zoning. (This could be a powerful incentive if and when states and cities face budget shortfalls after federal COVID relief dries up over the coming years.) And the House-passed YIMBY Act would try to shame cities and towns into relaxing zoning requirements by mandating that recipients of federal community development grants “go on the record with why they are not adopting specific pro-affordability and anti-discriminatory housing policies.”
The federal government has the power to be aggressive on housing. Congress has authority to intervene in and override restrictive zoning at the local level, and has exercised it before: the Fair Housing Act of 1968 overrode discriminatory local zoning ordinances; the Telecommunications Act of 1996 overrides local land-use regulations that impede the construction of cellphone towers; and the Religious Land Use and Institutionalized Persons Act of 2000 overrides local zoning laws that discriminate against religious institutions.
One could imagine a new federal authority empowering HUD to target a certain number of new housing constructions to keep up with population growth in areas where supply isn’t meeting demand. Maybe that could override restrictive zoning laws getting in the way of new construction. While reducing local impediments will go far toward unleashing new supply, we might also consider adding a public option for housing to close residual gaps between supply and demand in certain areas or for certain types of under-provided housing. And we could also consider leveraging the highway funds that the federal government doles out by making them conditional on states and localities reforming their zoning laws.
That kind of national action is particularly necessary as the largest generation in American history rocks the housing market. And without it, millennials are stuck facing a perfect “recipe for cooking up a one-of-a-kind household affordability crisis,” as The Atlantic’s Derek Thompson put it:
We can harmonize housing in America by leaning into scarcity: making a depleted buyer base rationed off by wealth (through high prices and high interest rates) match an insufficient number of houses. Or we could do something different and achieve a harmony of abundance: ample and affordable housing meeting the needs and dreams of a generation of young adults trying to make their way onto the path to prosperity that their parents and grandparents followed. Only one will truly free the cursed generation of American millennials from the long claws of the Great Recession.
