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For Younger Generations, Homeownership Is Slipping Out of Reach

Buying a home is the largest purchase most people will make in their lives. No matter your age, the decision to purchase a home is a big one, and it often requires strong financial stability to become a reality. For millennials, however, this task is proving to be more difficult to achieve. Today, homeownership among this generation has hit a new low.

Thus, many millennials are choosing to forego homeownership. In fact, according to a recent Urban Institute study, the millennial homeowner rate is at less than 37 percent. Real estate companies and news outlets have pondered over this recent trend, and although the reasons behind this are complex and highly dependent on individual circumstances, there are significant recurring themes that many millennials can identify with.

Homeownership After the Housing Crash

Most millennials remember what it was like watching their parents struggle through the housing market crash of 2008 and the financial devastation that followed. As a result, many are wary of making investments in fixed assets like housing in markets that go up and down based on the economic growth of a certain location on any given year.

"Younger households were hit considerably hard or harder with the recession," notes Abbe Will, a research analyst at Harvard University's Joint Center for Housing Studies. "There are a lot of headwinds for younger households to enter into homeownership today and moving forward."

The Great Recession was the worst economic downturn since the Great Depression, beginning in December 2007 and ending in June 2009. During this time, the unemployment rate jumped from 5 to 10 percent -- the highest it had been in over 25 years. Because of the limited regulations on banks, lack of government housing policies, and the financial instability that millennials experience, this generation has taken a hard pause on homeownership.

Millennials Are Taking on More Debt

Now in their 20s and 30s, the millennial generation would typically be poised to purchase their first family home. However, a survey of over 5,500 millennials born between the 1980s and mid-1990s indicates that only 24 percent demonstrate adequate financial knowledge -- a critical factor in such an important financial decision. Additionally, 80 percent of millennials already have some form of long-term debt they are paying off, and this type of loan-to-income ratio can make it difficult for people to be approved for a mortgage.

Many millennials are racked with the two most common types of debt: student loans and accumulated medical expenses. As the generation who grew up during the technology boom of the 1990s and early 2000s, most millennials also grew up during the time when the cost of getting a four year degree skyrocketed 213 percent. The cost of homeownership, medical bills, and education have all spiked drastically over the last several decades, which means millennials are experiencing living costs that have far surpassed the costs of prior generations.

For some, this debt and the lack of medium- to high-income jobs available have created circumstances in which millennials are unable to make regular monthly payments on their outstanding debt, which has completely decimated their credit score. This has led many millennials to believe that they will be unable to purchase a home in the future and has set a different standard of success for those in this generation that does not involve buying a home.

For Many, Renting Makes the Most Sense

Aside from financial instability, there are a number of reasons younger generations may be postponing homeownership. One of these could be the costs associated with owning a home. There are many responsibilities that come with homeownership, such as taxes, lawn care, and general home maintenance. Renters don't have to worry about footing the bill for household emergencies, like if your pipes freeze during winter, you have an expensive electrical issue, or the roof of your home needs to be replaced.

Many millennials simply don't want the responsibilities of owning a home, and they don't want to stay in one place for the rest of their lives. Typically, buying a home comes with the mindset of settling down, getting married, and having kids -- plans that are notoriously unpopular among millennials. This generation has created a significant shift in family planning, waiting longer than ever to get married or have kids, which are often circumstances that push adults towards homeownership.

Whether or not millennials have the intention of buying a home one day, this is a purchase they'll be waiting for until they truly feel financially prepared for it. However, this may not be too far in the future. Many millennials are waiting to purchase a home because they are currently stuck in low-income jobs, a circumstance that is partially due to the lack of high-paying jobs currently available. Studies suggest that baby boomers 55 years of age and older are making up almost 50 percent of the workforce, working for longer than they did even a decade ago in an attempt to save more money for retirement. This delay in retirement results in fewer high-paying positions for younger workers.

Not All Millennials Shy Away From Homeownership

Despite the aforementioned problems and reasoning, the American dream of homeownership is still very much alive and well for younger generations. Credit isn't the only issue, as there are plenty of methods for getting a mortgage with poor credit; most millennials are simply waiting for the opportune moment to invest. Although seeing how Generation Z fares in comparison to millennials may give a better indication of whether it's a generational struggle or simply a struggle of the times, younger generations are all facing the same circumstances. Homeownership may not always continue to be as practical as it has been in the past, but it will always be a common investment for those looking to lay down roots.

Posted by jhamilton at February 19, 2019 1:51 PM
Comment #438309

Finding a home or housing is especially difficult in certain places like California, and some large cities, like New York City (which are both losing people and business at the moment),
Perhaps people should consider moving to states with better economies.
Houses in most states cost about one-third (or less) of what they cost in California, or around New York City.

People should probably rent until they are serious about building equity, which requires paying less interest to the bank, which cannot happen by only making the scheduled payments on a 30 year loan.
That is:

  • (a) avoid buying too much house;
  • (b) try to save up a large down-payment (think of it as practice in making mortgage payments); a down payment of 20% will avoid having to pay for PMI (Private Mortgage Insurance),
  • (c) and try making double payments (cutting the total interest by about 67%, or better, and reducing the loan from 30 years to about 10.83 years, or less). Think of it as paying yourself, instead of the bank.
For example, a $200K loan at 4.0% for a 30 year loan will have a $954.84 per monthly payment, and total interest over 30 years will be $143,735.87. In addition, there

And, a $200K loan at 4.0% for a 30 year loan (but paid in 10.83 years) will have a $954.84 per monthly payment, and an additional $954.84 per month (specifically, on the principal), and total interest over only 10.83 years will be $46,925.17 (67.4% less; a savings of $96,810.70).

Home buyers should understand the following, and track the bank’s calculations, because the banks make mistakes sometimes.

COMPOUND INTEREST LOAN (Annual Percentage Rate):
Payment = Principal * ( I * (1.0 + I)^n) / ((1.0+I)^n -1.0)
n = total number of payments
I = (%Interest_Rate) / (100.0 * (PaymentsPerYear))
PeriodsPerYear = 12
Periodic_Rate = Annual_Percentage_Rate / (100 * Periods_Per_Year)
APR = Annual_Percentage_Rate = Periodic_Rate * Periods_Per_Year
APY= Annual_Percentage_Yield = ((1 + Periodic_Rate)^(Periods)) - 1

Here’s a Microsoft Excel template calculator spreadsheet that will calculate payments, interest paid, adjustments for extra payments (on principal), and grand totals. Simply enter the known information in the BLUE fields (i.e. loan amount, total months, interest rate, total payments scheduled, total payments per year, and the starting month and year), and click on the “Enable Editing” near the middle-top, and save the file if you want your own copy (which was scanned first to ensure there are no viruses).

Posted by: d.a.n at February 19, 2019 4:01 PM
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