A recent NerdWallet survey found that 82% of millennials say purchasing a home is a priority. A LendEDU survey found that number to be even higher at 89% of millennials wishing to become homeowners. With most young people in the U.S. (roughly ages 21-37), reporting they’d like to purchase a home, why have just 37% of millennials made the jump?
There isn’t one clear-cut reason why millennials aren’t owning homes at the same rates as previous generations. At the same age, about 45% of baby bombers and Gen Xers were homeowners. Financial Sense’s Associate Wealth Manager Crystal Kessler explained a few of the many factors contributing to the slower rate at which millennials are buying homes.
See Coffee and Avocado Toast Aren’t Keeping Millennials From Investing for audio.
What’s Different for Millennials?
An important part of this conversation is the 26% of millennials who site a lack of savings. “Many people, and especially millennials, are paying off large student loans on a monthly payment plan. This cuts into how much they have available to save and put toward a down payment on a home,” Kessler said.
Four out of five millennials believe it will be more difficult to purchase a home than it was for previous generations. According to a study by Urban Institute, other important factors playing into the decreased rate of millennial homeownership include delayed marriage, increased racial diversity, moving to high-cost city centers, experience from the Great Recession and a lack of financial education.
“Millennials need to be educated on what goes into homeownership and what steps need to be taken to take to get there,” Kessler said. Many millennials are not properly equipped with the knowledge of how to manage their money and invest properly in order to save for a 20% down payment on a house.
Make Sure You’re Prepared
Kessler believes homeownership is an important financial goal and one that we should place a high value upon. There are significant advantages to owning including tax incentives and having the property as an investment. However, Kessler does warn that in certain situations, prioritizing homeownership might not be the right financial decision.
“Location and income play a large factor in determining if it’s advantageous to buy a home or continue renting.” Kessler also noted large amounts of debt or a lack of savings can be good reasons to temporarily hold off. In addition to securing your 20% percent down payment, it’s crucial to have emergency savings in place.
“Make sure you have three to six months of living expenses saved…this includes mortgage payments, utilities, groceries, transportation, etc. If you lose your job, your mortgage won’t go away and be forgiven. Having emergency savings will give you some peace of mind and time until you find a new source of income.”
Know your upfront costs. You’ll need a 20% percent down payment… but buying a home includes other costs as well. “When applying for a loan, there are closing or settlement costs involved that can average between 3-7% of the price of the home…and if you see that your mortgage rate involves points, you’re paying more upfront costs to lower your interest rate,” Kessler explained.
See So, You Want to Be a Homeowner? to learn more about where we are in our current interest rate cycle, where rates are headed, how to know if real estate is too expensive and if you should wait before purchasing a home.
Assemble Your Team
While it can feel daunting when you’re at the starting line, working with the right people can help to make homeownership a reality. Kessler’s advice is to work with a financial planner. “A planner can educate [millennials] on what price range of homes and what interest rate is best for their budget. They can also help to figure out appropriate down payments and how to get there.” Kessler added, “every situation is different and when someone can see exactly what you need to do to achieve a goal it makes accomplishing that goal far easier and more attainable.”
Get your team together. In addition to finding the right financial planner, Kessler suggests finding a real estate agent you trust. “A good real estate agent is going to follow up with the owners, make sure you’re comfortable and ensure that your bid is in on time.” The agent will know what you want and help you to get there.
While millennials are becoming homeowners at lower rates than previous generations, it’s nearly impossible to point to one specific reason why and to one specific thing that can change that. For many, the thought of homeownership can still feel like a lofty goal. Kessler’s advice can be used as a road map to help you get on the right track toward one day owning a home.
See below for an excerpt from Coffee and Avocado Toast Aren’t Keeping Millennials From Investing.
Now that we've talked about how to fill up your emergency bucket and your retirement bucket, let's talk about mid-term goals that millennials have made as a top priority. A NerdWallet survey found that 82% of millennials say buying a home is a priority. So, once you've saved for retirement and you've gotten all those other emergency funds saved, how can you make that happen?
Right, so everyone paints this horrible picture of why millennials aren't buying homes because of ridiculous expenses like avocado toast and our daily coffees being $40. Or the best line that I've heard about why we're not buying homes is we get the worst ‘FOMO:’ fear of moving out of our parents’ house.
According to a study done by Ellie Mae and 2017, which analyzes mortgage data, millennials represent about 45% of all purchase loans. The true reasons why millennials aren't purchasing as early as they could be, is because we have large students’ loans and that’s a huge issue for us. And then with interest rates being as low as they are, we're competing against investment buyers.
The housing market is at all-time highs. And although it's cooling down, you don't want to buy at the top of the market because you don't want it to go down. And then another reason being that there are always multiple offers on houses, and that drives prices up.
The final two reasons are cost of living and financial education. It tends to be a lot more expensive to buy a home in urban areas where many millennials tend to live than it is in rural areas. Going back to what we talked about before, not being equipped with the knowledge of how to invest is really going to impact you being able to save for a 20% down payment on a house.
I am a millennial and one of my top priorities is to buy a house. About a year ago I was in the market. Originally my dad was going to be helping me out with everything, and I was going to work on paying him back. The market was hot and there were always multiple offers on every place that I was putting bids on, so that really didn't help me out. Every single time investment buyers were coming in with all cash offers, and when comparing that to a loan, every owner is going to take that cash offer before they take a loan, because they think that you're going to default on your loan. So, I got very discouraged after losing five places coming in at the same exact offer prices the only difference being that I had a loan and they had all cash.
I decided to continue living with roommates, save my money aggressively and then enter the market again, when I can do it without my father's help. I’ve now saved up enough money and I'm pretty proud of that. It's definitely going to be a challenge. But it's nice, because I've seen housing prices of the same exact condos that I was really looking at are actually significantly lower.
If you are starting to look and go into the market as a millennial, I have a couple tips to kind of help you out. One, you should get pre-approved, get the pre-approval letter and have it ready. Each time you're ready to submit that bid for that new house, write a personal letter about yourself and your personal experience of how you are a first-time homebuyer and you know why you're valuing this property.
It's almost like applying for a job, you have your cover letter your resume, proving yourself kind of thinking of it in that same way. And you have to set yourself apart from the other buyers because you're going against these all cash investment buyers. And just from a personal experience, I had a letter that I had written, it was about me being a first-time homebuyer and it did work out one time. I was going against another investment buyer who was paying all cash. And so, they were like, let's give this girl a chance. Because it is her first time, we like the fact that she's a first-time homebuyer. They did something called a best and final offer and it is actually the worst. You basically put in your offer at your best and final price. So pretty high, the highest you're going to be able to go. And so, we both came in at the exact same best and final offer and they still gave it to the cash buyer.
It does show that if you do write something personal about yourself, it's going to set you apart a little bit and they're going to give you more of a chance. Now, maybe if you come and higher, you'll really get it.
But getting that letter in certainly did help me at least get to that final stage.
Another thing to keep in mind is to I work with a good real estate agent that you trust, because a good real estate agent is actually going to follow up with the owners, make sure that your bid is in on time, making sure that you're comfortable, and they know what you want. Once you're able to trust somebody, it's easy to reach back out to them and say, ‘Hey, I'm back in this market.’
Last but not least, I really recommend working with a financial planner to set your goals if you are looking into buying a house because they're going to be able to let you know what you can afford, what kind of interest rate is good for you, and then also what down payment you should be expecting to pay.
