Overall, there’s been a lot of discussion about millennial home-buying habits. While the housing market has recovered since the 2008 bust, many millennials are still not buying homes. It’s a divergence from an old pattern in the United States, where home ownership has always been viewed as one of the key pillars to building wealth. According to research from the Urban Institute, home ownership among millennials aged 25 to 34 is eight percentage points lower than baby boomers at the same age and more than eight points lower than Generation X.
However, millennials may not necessarily be opposed to buying homes altogether. Many may just be waiting longer; today, the median home-buying age is estimated at 36 years old. On top of that, some analysts believe the idea that millennials aren’t buying homes is a just a myth.
While millennials happen to be the largest group of U.S. homebuyers right now, they’re still lagging behind previous generations. millennials do appear to be interested in home ownership, but at the same time, this generation faces challenges that create obstacles to this milestone.
Declining Home Ownership is a Combination of Factors
The idea that millennials aren’t interested in buying a home can often be over-generalized or misconstrued. Some people think they prefer to spend their money on high-priced avocado brunches, and others they’ll only live in big cities with a soaring cost of living. Of course, this isn’t really an accurate overall reason behind lack of home ownership. There are other barriers to consider.
Affordability is one of the biggest issues for recent college graduates and would-be millennial homebuyers. Interestingly, millennial homeownership was on the rise and showing a positive upswing. However, millennial home-buying rates dropped in the first quarter of 2018. This was attributed to the problem of affordability and the rising interest rates. Interest rates on mortgages were up to the highest level in four years at the start of 2018.
Younger people are simply priced out of buying a home. Wages aren’t going up nearly enough to account for the rising costs of a home. According to data from Zillow, only 39 percent of millennials would be able to afford a standard 20 percent down payment needed for a mortgage.
Many millennials also report that it’s difficult to find a home in their price range, and 37 percent of buyers say when they did buy they went over their planned budget. This is compared to 29 percent of buyers of all ages.
Another barrier to buying a home is student loan debt. Now, millennials have staggering amounts of debt well before they look for a home. Outstanding student loan debt stands at $1.4 trillion in the U.S. right now. Federal Reserve research shows that anywhere from 11 to 35 percent of the decline in home ownership among people aged 28 to 30 is the result of student loan debt.
How Can Millennials Prepare Themselves for Homebuying?
For millennials to buy a home, it’ll be hard to make it happen without resolving student loan debt first. Most lenders aren’t going to give a mortgage to someone who has a large amount of debt they’re already paying off. Those monthly student loan payments are eating up a significant portion of income each month. Estimates show that for every 10 percent in student loan debt a person has, their likelihood of home ownership drops one to two percentage points.
The best thing millennials and young people can do is first work on tackling student loan debt. The most obvious solution is increasing the monthly payment. If you can pay down your student debt sooner by simply paying more, then you’d be in a better spot to apply for a mortgage. Another method is to reduce your monthly payment; for instance, refinancing student loans could offer leeway in this regard. If you can get a lower interest rate, then there may be more room in your budget to either pay more or get moving on a mortgage.
Regardless, paying down student loans should be a number one focus before attempting to start saving for a down payment. Making lump-sum student loan payments or if applicable applying for student loan forgiveness may be options as well.
There’s an unfortunate misconception that millennials don’t want to buy homes. They do, but there are very real and very challenging economic barriers to doing so. The best thing millennials can do is address the financial barriers they face.
This post is intended for informational purposes only and should not be taken as professional advice. The point of view and opinions expressed in this post are those of the author and do not necessarily reflect the position of Realty Executives International. This article was written by Andrew Rombach, a Content Associate from LendEDU – a financial product marketplace and consumer education website.