Millennial downsizing could have big effect on economy

For most people through most of history, more has typically meant, well, more. More possessions and property have equaled prestige, position, preeminence. For reasons of finance and ethics, many millennials today are concluding that less is more. Given that this generation has bucked the trend on just about everything imaginable — starting families later, leaving the suburbs for the city, valuing lifestyle over career strides, sharing too much over social media — it should come as no surprise, then, that there is a subset of millennials that is all about downsizing.

Tiny houses

The trend has become known as minimalism, and it could mean walking, biking or taking an Uber instead of purchasing and driving a car. Or borrowing a Kindle book rather than acquiring the hardcover version. Or buying a so-called “tiny home” — as in 400-square-feet-maximum tiny — over a traditional-sized house.

There are now an estimated 10,000 tiny houses in the U.S., as tiny-house owner, blogger and author Ryan Mitchell recently told a USA Today reporter. While that’s a minuscule number, it represents a nearly 5,000 percent increase in fewer than five years. Millennials are fueling the rise, and while it may seem impractical, bizarre or even cockamamie to some (hey, I’m a millennial and I couldn’t do it!), in many ways it makes complete sense.

With a tiny home, a person can forgo a mortgage, get unfettered mobility (tiny homes are often on wheels and all are small enough to be transported) and enjoy a radically reduced environmental footprint, all in one fell swoop. All of these things matter a great deal to millennials.

Homeownership and the American dream

Though they’re delaying marriage and kids, are shouldering tremendous college debt and have had difficulty finding employment (as we’ve talked exhaustively about in this column), millennials do want homes. In fact, according to a January 2016 Zillow survey, 65.4 percent of millennials associate homeownership with the American dream, more than any other generation. Yet the average home remains out of reach. According to an April report by Apartment List, an online rental marketplace, 77 percent of millennials say that affordability is the biggest obstacle to buying a home.

High rents across the nation are a major factor, because it makes saving for a down payment more difficult. But Zillow’s chief economist Svenja Gudell agrees that the largest single impediment is finding homes that are affordable. She says the Great Recession is to blame, because underwater homeowners — those who owe more than their house is worth — are staying in their homes, keeping supply low. As a result, homeownership rates among people age 35 and under have been falling for over seven years (according to the U.S. Census Bureau).

As I mentioned, it’s not just economics driving the tiny-house phenomenon. A downsized abode checks a lot of boxes for millennials: in addition to mobility and environmental friendliness, the unnecessity of ownership in a sharing economy, the migration to urban settings, the prioritization of experiences over possessions and even corporate mistrust.

The upshot of downsizing

It’s yet to be seen if minimalism is merely a fad or will grow and persist as a value system with millennials. If it's the latter, the ramifications could be huge. Traditional homeownership, for instance, is a powerful economic driver of GDP. Raw-material suppliers, Home Depot, Lowe’s, building tradespeople, landscapers, appliance and furniture manufacturers and retailers, Realtors and more all depend on the buying and selling of homes. Homeownership is also a critical component of household wealth creation — in fact, the average U.S. household’s net worth consists primarily of home equity. Moreover, it can even be argued that much of our individual maturity, responsibility and civic-mindedness is anchored in homeownership.

On the other hand, the parents and grandparents of millennials have come to live well beyond their means. Our country, privately and publicly, has a crippling debt problem. The average consumer debt per household is over $97,000 (New York Federal Reserve Bank, Federal Reserve, U.S. Census) and our national debt is over $19 trillion. Viewed from that perspective, some minimalism is in order.

If you’re concerned about your own financial outlook, consider advice from a financial adviser.

Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other week in The Tennessean. For more information, visit www.capwealthadvisors.com.