"Why can't they be like we were, perfect in every way?"
-- "Kids," Bye Bye Birdie
There are almost as many names for Generation Y as articles about how they won't leave home, get married, buy cars, buy homes, get jobs, stay with a career, stay in one place, call their parents, dance appropriately, or listen to good music. Whether you call them Millennials, Generation We, Generation Next, Echo Boomers, or the Net Generation, many think their spending preferences diverge greatly from those of past generations. The truth is, they may just not have as much money to spend to match their parents.
Grow up!
A recent Atlantic article sums up several differences between Millennials and their predecessors:
In 2010, adults between the ages of 21 and 34 bought just 27 percent of all new vehicles sold in America, down from the peak of 38 percent in 1985. Miles driven are down, too. Even the proportion of teenagers with a license fell, by 28 percent, between 1998 and 2008. ... Just as car sales have plummeted among their age cohort, the share of young people getting their first mortgage between 2009 and 2011 is half what it was just 10 years ago.
These trends have spawned the "sharing economy," where less is owned outright and more is rented. This can make established car and housing companies uneasy, while completely new companies like car sharer Zipcar (Nasdaq: ZIP) hope to capitalize on the trend. But are these differences because of a generational rift in thinking, or wallet size?
Source: Federal Reserve Bank of St. Louis, U.S. Census Bureau.
Taking a look at median incomes versus median sales price of homes, instead of an income covering more than 25% of the cost of a home as in the 1970s, it now covers a little more than 20%. That difference may not seem like much. However, that works out to be several thousand dollars that new earners may be extremely hesitant to part with -- especially after being bludgeoned with the lesson that taking on debt even at historically low mortgage rates could be financial suicide. And worse, if you take the median salary for new graduates of $30,000, that income will only cover a little more than 13% of the median home price.
More school debt
Additionally, with the median student loan debt at $12,800, new graduates will focus more on paying back loans for their first years outside of school rather than taking on mortgage payments, especially because the interest rate on those loans sits at 6.8%. Of course, since 62% of new graduates believe that more education will be necessary for a successful career, saving for more school might take precedence over a new home purchase.
Less static residences
Millennials experienced the job wreckage of the Great Recession and know that any loyalty between employer and employee is not guaranteed. As LinkedIn (NYSE: LNKD) CEO Reid Hoffman states in his book, The Start-up of You, "There used to be a long-term pact between employee and employer that guaranteed lifetime employment in exchange for lifelong loyalty; this pact has been replaced by a performance-based, short-term contract that's perpetually up for renewal by both sides." For example, one survey noted that 91% of Millennials expect to stay in a job for less than three years. Why go through the hassle of purchasing property just to restrict your future job market to one location?
Cars, being mobile of course, would suffer less from this new transient job market. But if you are moving between areas that Zipcar or its competitors serve, there's little reason to outlay thousands on a car when spending less on a membership will do. Ford (NYSE: F) is taking the long-term view that eventually users will buy cars and partnered up with Zipcar last year to provide 1,000 cars at universities around the country with a deal on membership and rental fees.
The kids are all right
The difference between generations could be more financially based rather than a new-age love of sharing. As the Atlantic article noted, "nine out of 10 Millennials say they eventually want a place they own." And, as Warren Buffett of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) said in his annual shareholder letter, "eventually hormones take over," and "living with in-laws can quickly lose its allure." I would doubt any Millennial would reject a new car -- if they could afford it. And once Millennials realize significant others and kids aren't as mobile as careers, housing will also seem like a reasonable investment.
If you think kids will still buy cars, and you're considering a long-term investment in Ford, make sure to check out our brand new premium report that includes three key areas you must watch, along with three reasons to buy and sell now to help you reach your own decision. The report also comes with free critical news updates for one full year, so grab your copy of our Ford report today.
