The real reasons Millennials are struggling to become homeowners
Article reposted from Zillow | July 31, 2018
Young, highly-educated millennials [generally between 21-37 years old] earn more than typical American workers (and much more than their non-college-educated peers), make up a growing share of the population in some of the nation’s fastest-growing and most-dynamic cities, and are disproportionately likely to work in well-paid tech jobs.
And still, they’re struggling – mightily, in many cases – to achieve homeownership at rates similar to their parents when they were the same age.
There’s no single reason why millennials can’t get over the homeownership hump – it’s a complex tangle of social, financial and housing market headwinds that have proven incredibly difficult to overcome. But while it’s not all bad, here’s just some of the data that helps highlight the true complexity of the problem:
Saving for a Down Payment
- In June, the median U.S. home was worth $217,300 – the highest value ever recorded. A 20 percent down payment on that home amounts to more than $40,000 ($43,460, to be exact). It takes a while to save up that kind of cash. How long? Glad you asked…
- Assuming a buyer saves 10 percent of their income each year toward a down payment, it will take the typical single home buyer making the median income more than a decade (11 years) to save for a down payment on the typical U.S. home.
- But in a fast-moving market like this one, saving for a down payment can often feel like trying to hit a moving target. The median U.S. home is expected to grow another 6.6 percent in value over the next year. So next year at this time, assuming growth in line with our forecast, that typical home will be worth more than $231,600, and a 20 percent down payment will require more than $46,000 in savings. And the most-affordable homes are growing in value the fastest.
- It’s no wonder, then, that saving a sufficient down payment was recently cited as the biggest obstacle for renters looking to transition to homeownership, regardless of their age, income, gender or geography.
Not Many Homes to Choose From
- And even once that down payment is secured, actually finding an affordable home to buy is not guaranteed. The total number of homes available for sale nationwide has fallen year-over-year in every month for almost three-and-a-half years, and counting. And it’s particularly bad among the more affordable homes typically sought by younger and first-time buyers. In June, barely one in five homes for sale (21 percent) was an entry-level home.
- As a result, many millennials turn to renting – which is even less affordable than buying a home. As of Q1 2018, S. renters making the national median income and looking to pay the median rent should have expected to pay 28.8 percent of their income to their landlords. That’s well above both historic norms of 25.8 percent and what their home buying peers could expect to pay (17.1 percent).
Stagnant Wage Growth
- At the same time, young, college-educated Americans are struggling with stagnant (at best) wage growth: Nationally, after adjusting for inflation, the typical employed adult made 1.2 percent less in 2016 than they did in 2005. But recent college grads fared even worse, making 2.4 percent less.
- So it’s no wonder that many millennials are choosing to live with mom in order to save, at least in part, on pricey housing costs. Almost a quarter (22.5 percent) of 24-36 year olds – 12.3 million young adults – live with their mothers, up from 13.5 percent in 2005. And perhaps unsurprisingly, more young adults live at home in areas where typical housing costs – particularly rents – are generally more unaffordable and consume a larger share of income.
- And as wage growth stagnates and housing costs keep rising, student debt isn’t going away. This might help explain why more than a quarter (28.2 percent) of U.S. twenty-somethings with college degrees live with a parent, up 8.8 percentage points in a little more than a decade.
- But while living with mom can have some perks, it’s not exactly sexy. At the same time as the share of young people living with mom was rising, the share of college-educated twenty-somethings living with a romantic partner fell. Nationally, one-third (34.5 percent) of young graduates reported living with a partner in 2016, down 9.4 percentage points from 2005.
- This split has a number of implications, not least of which is the fact that it takes a single, solo earner under the age of 35 12.4 years to save a 20 percent down payment. But it takes partnered, dual-income earners of the same age just 4.9 years.
But It’s Not All Bad!
So yes, the statistics are daunting and the struggle is definitely real. But there are some reasons to be optimistic as the massive millennial generation ages into its prime:
Millennials Want to Own Homes
- Contrary to popular belief, young Americans believe strongly in the value of homeownership: According to a recent Zillow survey, 74 percent of 18-to-34 year-olds agreed that owning a home increases their standing in the local community; 69 percent said owning a home is a key to higher social status; and 67 percent said owning a home is necessary to live the American Dream.
- And according to the same survey, young Americans don’t only believe in homeownership, they’re positive in their ability to one day achieve it: 78 percent of 18-to-34 year-olds said they were confident that they will one day be able to afford to own a home.
Student Debt May Delay Homeownership, but Won’t De-Rail It
- If they’re willing to be patient, research shows that student debt, while burdensome, doesn’t have much of an impact on whether or not the debt holder will eventually own a home. Lots of debt may delay homeownership, but it’s unlikely to de-rail it completely.
- Of bigger concern are those students that take on a large amount of debt and don’t finish their degree. So be cool, stay in school.
- Yes, those millennials that stuck it out in school during the Great Recession were dealt a tough hand graduating into a very difficult job market. But those effects have probably already worked through the system – research shows it takes about six years for homeownership rates among those that graduated during a recession to reach levels of those that graduated during more normal conditions. Those that graduated during the teeth of the recession in 2008, 2009 or 2010 are likely at or close to being in position to buy a home by now if they so choose.
It’s not all About Income, And You Don’t Need 20 Percent Down
- It’s important to remember that 20 percent down is very rarely a requirement. Many buyers purchase a home with as little as 3 percent-to-5 percent down. You may need to pay a little extra in mortgage insurance depending on the type of loan, but the payoff could be worth it.
- For many young families, income alone isn’t what determines homeownership. Rather, people choose to buy a home when life demands it: When they need more space for a family, or need to relocate to be closer to a job.
- Millennials are also a flexible bunch: Yes, they may choose to rent when buying a home isn’t feasible, but they’ve also proven to be flexible when buying is their top priority. Many millennial home buyers choose to lengthen their search and wait until the right home becomes available, search in different areas or sacrifice some “nice-to-haves” in favor of “must-haves.”
And Finally: The Homeownership Rate Among Millennials is Actually Rising
- The national homeownership rate is slowly rising – driven up in large part by millennials on a home shopping spree. As of Q2 2018, the homeownership rate among those under the age of 35 jumped to 36.5 percent, the highest level since the end of 2013 and up strongly from 35.3 percent at this time last year.