High home prices along with strong demand have today's youngest homebuyers moving to smaller cities — and that could mean a boom for local economies and home values in those markets.
For example, Madison, Wisconsin, is a new mecca for millennials, according to a recent study from the National Association of Realtors, which ranked the top millennial housing markets based on both their high share of current young residents and of millennials moving in. Three out of 4 recent transplants to Madison were millennials and they have mostly stayed in the area, giving the city an overall high millennial population.
The growth is partly due to a burgeoning tech sector as well as the growing popularity of the University of Wisconsin with out-of-state students. Google recently announced it was expanding its Madison offices.
Garrick Rohm, 30, just bought a condominium in Madison. He was renting but decided that it was time to make a longer-term commitment to the area.
"I love being able to bike to work. You can get anywhere you need to go. There's lots of music venues," said Rohm. "When you're walking around Madison downtown, you see young people all over the place."
Rohm works for a Zendesk, a software company based in San Francisco, but which opened its new Midwest hub in Madison last October.
"A lot of the tech companies do pay higher salaries, and I think that is attracting college graduates to the city," he said.
Rohm characterized the Madison housing market as affordable but competitive. He didn't have any trouble buying his home, but he said he is seeing more and more buyers come to the table with cash in order to win deals.
Christopher Ziegler, a real estate agent at Redfin, has seen the makeup of Madison change dramatically in a very short period of time.
"It is surprising to see this city grow into what it has become, but it's starting to make more and more sense just because of all of the tech jobs that we're offering, the UW campus that we have, and just the amazing culture," said Ziegler. "I've had an influx of millennials moving into the area in the past year or so, and it's because everything on the coast where they're currently living, it's starting to become more unaffordable."
Other metro areas that are seeing millennials multiply: Oklahoma City, Grand Rapids, Michigan, Omaha, Nebraska, Durham, North Carolina, El Paso, Texas, and Salt Lake City, Utah. Even some pricey markets like Seattle and Denver are getting an influx.
"As long as supply keeps up to meet demand, and prevents costs from rising too high and too rapidly, these identified metro areas are likely to see an uptick in purchases from millennial homebuyers," said Lawrence Yun, chief economist at the National Association of Realtors.
In the majority of the top 10 millennial markets, the unemployment rate is lower than the national average, and home prices are generally lower. Based on average income, millennials in these markets can afford to buy 1 out of 4 homes listed for sale. In Oklahoma City, they can afford 30%. By comparison, millennials can afford just 10% of the homes in Dallas, 13% in Boston and barely 2% in San Diego.
While a large share of millennials initially move into major metropolitan markets, like New York City, San Francisco and Boston, they don't tend to stay and buy homes – putting down roots for the long term.
"The data show that they leave," said Nadia Evangelou, author of the NAR study. "They cannot afford it, so they probably leave for that reason."
While a massive wave of millennials is reaching the typical homebuying age, fewer are able to afford it than previous generations at their age. Nearly 45 million Americans will reach the typical age for first-time homebuyers in the next 10 years, 3.1 million more than in the 10 years prior, according to a recent analysis by Zillow. Over the last five years, however, prices for starter homes have jumped 57% and inventory is down 23%. As demand surges, the situation can only get worse.
"The potential first-time buyer bulge, without inventory to meet it, suggests that the typical age of first-time buyers will continue to be pushed further and further out," said Skylar Olsen, Zillow's director of economic research. "The rate of single-family construction is still behind the pace we experienced in the 1990s, and without an increase in truly new supply, would-be first-time buyers will instead persist in the rental market."
Inventory of homes for sale in smaller U.S. markets tends to be more plentiful than in major cities, but that is changing as demand rises. The Madison market is getting increasingly competitive.
"It's pretty competitive in the Madison area right now. In the median price range around $265,000, a majority of the listings will have competing offers," Ziegler said.