Even though much has been said about the millennial generation’s inability or unwillingness to enter the housing market, they continue to make up the largest share of home buyers. But not all millennials are having the same experiences.
For its 2019 report, the National Association of REALTORS® separated the millennial generation into two groups for the first time: younger millennials (ages 21 – 28) and older millennials (ages 29 – 38). Overall, millennials made up 37% of all home buyers, the largest share. However, while older millennials accounted for 26% of home buyers, younger millennials only accounted for 11%. As their own group, younger millennials were out-purchased by every other age group except for the silent generation (those born between the mid-1920s and the early 1940s).
While this disparity makes sense, since younger millennials are just getting started in careers and are less likely to have the savings to commit to a sizable purchase, this group seems to be somewhat unique in its low rates of homeownership when compared with previous generations at that age.
Much of this trend may be explained by cultural shifts, where younger people are putting off marriage and children longer than any generation before. Without families of their own, today’s young adults may feel less of a need to “settle down” into a home.
However, it’s likely there are forces that keep even hopeful millennial homeowners from entering the housing market. From sky-high student loan debt to lackluster incomes, there are many reasons this generation may fear for their ability to one day buy a home.
Can anything be done, or are millennials doomed to a life of renting? While the obstacles they face aren’t insignificant, there are ways today’s young people can overcome them and purchase a house of their very own.
Student Loan Debt
Student loan debt weighs down this generation like no other. Not only has the cost of attending college risen sharply in the past few decades, but millennials also had the dubious privilege of entering the job market in the fallout of the Great Recession. A tough job market, rising expenses and stagnant wages have made it so many millennials, both younger and older, have a hard enough time keeping up with the tens of thousands of dollars in loan balances they owe. This financial situation has made many feel like buying a home is completely out of reach.
For U.S. adults who are currently paying off student loan debt, the typical monthly payment ranges between $200-$299, according to the U.S. Federal Reserve’s 2018 Report on the Economic Well-Being of U.S. Households.
With so much of their monthly budget already dedicated to loan payments, the idea of adding another, even larger one on top of that might not seem all that attractive, or even possible, to millennials.
One small step you can take to feel more in control of your student loan debt is to take a look at where you’re at and determine when you will realistically be able to finish paying off your loans. You can also do research to look at your options for debt management or consolidation. It may even make sense for you to enlist the help of a professional, such as a financial advisor. They can help you discover the tools and resources you need in order to combat your debt, as well as offer advice on preparing financially for homeownership.
“Education is key. Once people learn more about mortgages, student loans and other debt, and know how to pay it off properly, they can make a decision out of confidence instead of fear,” said Jessica Weaver, CFP, CDFA, of CFS Wealth Advisors.
If you have high monthly payments that make your debt-to-income ratio a stretch for getting a mortgage, you can talk to a financial advisor or do your own research to see if there are options for you to potentially lower your monthly bills, making a mortgage payment more manageable. Plus, with less of your monthly income going to loan payments, you’ll have more money to save for a down payment on a house.
Millennials have a reputation for working gig-type jobs, hopping from workplace to workplace and being less likely to stick with a single employer long-term in the same way their parents and grandparents did.
Some of these stereotypes are just that – stereotypes. While millennials may be more likely to job hop than older generations, that seems to be more of a function of being young than something that is specific to millennials.
In addition, the rise of the gig economy has allowed workers of all ages to find flexible part-time work or bolster the income they bring in from their full-time jobs.
While this may be great for millennials who are interested in flexibility and exploring career possibilities, it’s challenging to save and plan for purchasing a home when you are unsure of what the next few months may bring. It may also be difficult to find a lender that will give you a mortgage if you have a spotty or varying income history.
The typical rule of thumb cited by experts is that you shouldn’t buy a home if you don’t plan on remaining in it for at least five years. Millennials who feel unsure about what the future holds for them or are fearful of the prospect of losing a job or enduring a recession might be wary of entering into that big of a commitment.
Buying a house is a big deal, there’s no doubt about it. If you know your career or other life circumstances are likely to take you to a new locale sooner rather than later, it might be a safer bet to stick with renting.
However, if you’re interested in owning a home but are worried about how your circumstances might change in the coming years, you should take some time to sit down and look over your finances, your plans, your goals and where you realistically see yourself in five years. Would you be happy living in the same area for another five years or more? What are the pros and cons?
It’s not just about soul-searching; there are plenty of practical concerns that come with trying to purchase in this job economy, especially for millennials.
If you’ve job hopped in the past two years, or if you’re a freelancer or contract worker whose income fluctuates, you may be concerned about whether mortgage lenders will take you seriously.
Lenders look at many different factors when deciding whether they’ll lend you money to buy a home. One of the big ones is your income, which tells the lender whether you’ll be able to make your payments each month. Job hopping can be a red flag for a lender, but if you’ve recently left one job for another in the same industry with better pay, that’s generally seen as a positive. On the flip side, if you’re changing jobs quite frequently or switching between completely different industries, you’re likely going to have to find a job you like and stick with it for a couple years before you’ll be able to get a mortgage.
Freelancers or others with variable income may find themselves under a finer microscope when applying for a mortgage. Be sure you’re keeping detailed records of your business and income, so you have adequate documentation to present your lender. You’ll likely need at least two years of documentation showing a steady and reliable source of income.
The median listing price in the U.S. is $315,000, according to realtor.com®. While young people tend to be in the market for homes that are on the lower end of the price spectrum and are more affordable, many millennials still feel they’ve been priced out of the housing market, especially in areas where housing costs tend to be much higher than average.
This feeling may stem from the fact that millennials tend to prefer city living. Living in an urban area means easier access to public transportation and certain amenities, but it also means higher housing costs. Just look at New York City, where the median home price is $690,000. In areas like this, renting may be more affordable, especially for those who are still just starting out in their careers.
Use a home affordability calculator to demystify what home price your budget can handle. Then, take a look at your area’s listings within that range. Is there anything available that you can afford?
Typically, experts recommend spending no more than 30% of your gross monthly income on housing costs. If nothing in your town fits the bill, you might consider expanding your search. If you don’t mind moving a couple towns over or leaving the city for the suburbs (and a longer commute), you’re more likely to find something that you like within your price range.
Stick to a budget you feel comfortable with that will still allow you to have the lifestyle you desire. You may also need to be flexible with your home “must-haves.” This is your first home; it may not have everything you want.
With their budgets already stretched so thin, saving for a down payment is a big barrier to homeownership for millennials.
It’s often recommended to have 20% of a home’s purchase price saved for a down payment. At 20%, buyers avoid having to pay for mortgage insurance, which in turn lowers their monthly payment. Borrowers who put down 20% may also get better terms, since they’re borrowing less money and thus are less of a risk to the lender.
For many millennials, saving that much money is completely unrealistic. With rising rent costs and large monthly student loan payments (not to mention other costs of living), saving enough for a sufficient down payment could take years or even decades.
The 20% down payment, while often cited as the standard, isn’t always essential. There are many low down payment options that can allow millennial home buyers to get into a home with as little as 3% down on a house. For comparison, a 20% down payment on a $200,000 house is $40,000. A 3% down payment is $6,000. That’s no small sum, either, but it’s certainly more realistic than the 20% option.
Do some research into the different loan options available to you. You may just be able to find something that can get you a payment within your price range without having to save for years.
If you decide to and are able to make the leap, purchasing a home is one of the biggest investments you will ever make. To prepare yourself for such a big step, start by doing research. The more you know about the home buying process, the easier it will be.
“Understand the home buying process from start to finish,” said Peter Esho, CEO of CRIBZ. “Build an A-team of experts. What’s an A-team? People who are experienced to provide you with services and mentor you when things go wrong.”
If you’re able to, work with people who are experts in the industry. They can help you navigate the pitfalls some new home buyers may experience. Find a professional who will be able to help you with your home buying needs.
Millennials may be apprehensive about exploring the housing market, and with good reason. However, if purchasing a home is one of your dreams, there are ways to overcome the apprehensions and barriers that stand in your way. Do your research, figure out your priorities and be patient in reaching your goals.
Ready to begin the home buying process? Get started today with Rocket Mortgage® by Quicken Loans®.
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