The housing crisis is also a crisis of hopelessness as young Americans are giving up

According to a paper published earlier this month by Seung-Hyung Lee of Northwestern University and Youngjun Yu of the University of Chicago, younger generations are not only delaying homeownership, they are increasingly abandoning it.

This is because the housing affordability crisis has put ownership out of reach for millions. The median home price was 5.81 times median household income in 2022, up from 4.52 in 2010 and 3.57 in 1984. This doesn’t include related costs that have grown like insurance.

Once homeownership seems impossible, behavior shifts away from working toward saving enough for a down payment, Lee and Yu warn. On the other hand, renters who cling to dreams of homeownership tend to be more careful with their money and move on quickly, putting them on the path to ownership.

“These dynamics underscore the powerful role of hope: belief in the achievability of homeownership shapes savings, work effort, and investment decisions in worsening ways over the life course, with profound implications for long-term wealth inequality,” they wrote.

This helps explain the high consumption among Millennials and Gen Z who “spend relentlessly” on luxury purchases or vacations. In fact, the percentage of millennial renters who don’t have savings for a down payment jumped to 67% in 2023 from 48% in 2018, according to Apartment List data.

Meanwhile, demands for greater work-life balance and announcements of “quiet resignation” go hand in hand with the diminishing perception that working harder will pay off. Lee and Yu found that among renters with a net worth of less than $300,000, the proportion who admit to low work effort is 4%-6%, double the rate among homeowners.

As hopes of home ownership fade, new investment platforms and the proliferation of risky crypto assets have created an alternative means of growing wealth.

“If fixed savings and traditional asset accumulation are no longer enough to secure a home, some households may instead pursue high-risk, high-return strategies – such as investing in cryptocurrencies – as a last resort,” Li and Yu said. “For those excluded from the housing market, gambling on unlikely but potentially transformative gains may seem rational, especially among younger groups.”

“Live effectively from hand to mouth”

Even when there is no significant difference in wealth between young renters with a low probability of ownership and those with a high probability, change in behavior over their lifetime leads to vastly different outcomes, according to the researchers.

Giving up makes it more difficult to escape paths of declining wealth. They found that renters with low ownership odds still had close to zero net worth for most of their lives, “effectively living alongside a negligible asset accumulation.”

This behavior tends to continue, Li and Yu added. Children of parents who have given up hope start out with fewer resources and are more likely to give up as well. Conversely, children of homeowners are more likely to be homeowners as well.

“In this way, abandoning homeownership could serve as a transmission mechanism that entrenches and amplifies wealth inequality over generations, potentially leading to a society in which homeownership becomes increasingly out of reach for families without intergenerational transfers,” they explained.

By age 40, most renters determine whether or not they still have a good shot at home ownership. Lee and Yoo suggest assistance for renters on the margins who have lost hope but can still move into the hopeful category with enough money to cross the threshold.

Their research adds to growing signs of economic anxiety amid a general affordability crisis, even among upper-income Americans.

A recent Harris Poll found that many who earn six figures are particularly struggling. Among the findings is that 64% of those with six-figure incomes said their income is not a benchmark for success but just the bare minimum to stay afloat.

“Our data shows that even high-income earners feel financial anxiety, living with the illusion of wealth while privately dealing with credit card debt and survival strategies,” Libby Rodney, chief strategy and futures officer at Harris Poll, said in a statement.

In a viral Substack post last week, Michael Green, chief strategist and portfolio manager at Simplify Asset Management, said the true poverty line should be about $140,000 a year in household income to account for the rising cost of housing, health care, child care, transportation and college.

On the other hand, Americans below Green’s version of the poverty threshold continue to lag behind, even as they move up the income ladder.

“Our whole safety net is designed to catch people at the bottom, but it sets a trap for anyone who tries to get out,” he explained. “As income goes from $40,000 to $100,000, benefits disappear faster than the wage increase. I call this the valley of death.”