New York- Here’s an issue: U.S. young adults (the “Millennials” generation) are looking to buy a house, but there are obstacles getting in the way.
According to data from comScore (SCOR) and Realtor.com, 64 percent of Americans 21-34 years of age visited real estate websites in August 2015. That should be exciting for a national real estate market that is up 9 percent. Except: it isn’t.
Chief economist at Realtor.com, Jonathan Smoke says “People who believe that millennials are disinterested in homeownership are grossly mistaken. This generation hit the job market during one of the largest recessions of all time, and they’ve had to work hard to establish credit and save for a down payment. With the older segment just beginning to enjoy the life events that drive homeownership — marriage and children — now is the most appropriate time for them to consider homeownership, and that’s what we’re seeing.”
Smoke also points out that there are some “top impediments” that “signify significant barriers of entry” for homebuyers who are younger, though he thinks they can overcome these obstacles.
“Despite the increased role of millennials in the housing market, setbacks still exist and are preventing first timers from making even more of an impact,” he says. Additionally, Smoke points out that 37 percent of millennials can’t find a house that meets their budget; 40 percent haven’t found a home that meets their needs and 28 percent can’t come up with a downpayment.
Tougher mortgage rules from the U.S. Federal Housing Administration, which will factor in student loan debt when considering home mortgage applicants, are making matters worse. That’s a problem for many millennial homebuyers, with an average student loan balance being $27,000 for Americans 40-and-younger.
A further issue confronting younger homebuyers is their unweilding desire to live in hip, urban and more expensive places.
“Many first time homebuyers are having issues but there are two categories of these homebuyers,” says Ian Serota, a sales representative at Toronto, California-based Right At Home Realty. “The ones who are single are finding it hard to find a place to move to that isn’t too small for them in a location where they would like. Most don’t have vehicles and the lack of public transit outside of the core of the city makes it impossible for them to be outside the city.”
The other category includes couples, Serota says, who are looking to start a family or who have kids. “They want to be in good areas with good schools but in most cases those homes can cost 20 to 40 percent more than the less desirable areas,” Serota said. “Therefore many are moving to the east end of Toronto and are sacrificing quality of life with terrible commutes in order to get the home they want. Plus, the price of homes in the major cities keep going up, and many younger people do not wish to move to smaller towns as they are accustomed to the big city lifestyle.”
Some real estate professionals have another school of thought — millennials have been taught to view the act of buying a house as an investment, and they tend to turn to family to afford that investment, increasing their debt problems on top of student loans.
“Millennial homebuyers should be wary not to ‘jump the gun’ before they’re ready, as homeownership can be financially taxing for first-timers of any age,” says Ray Brousseau, executive vice president at Carrington Mortgage Services in South Hadley, Massachusetts. “Millennials should spend three to six months researching their options and talking to a variety of real estate agents, lenders and other homeowners. Ask these resources about how the home buying process works, and what they’d do differently their ‘first time.’ ”
“Additionally, millennial homebuyers should not feel be afraid to disclose personal financial information to a licensed loan officer,” he adds. “This will help you gain an idea of how a lender reviews your information. Find out if you can prequalify for a specific loan amount, it can tell you more about what you can afford long term.”
Then there’s the issue of wanderlust, where this generation of younger adults seems especially reluctant to lay down some strong roots with a new home purchase. “I’m a millennial who recently purchased a home, but I do see my peers being impeded in buying new home,” says Scott Trench, director of operations at BiggerPockets a Denver-based wealth management blog. “For example, transience is a problem. Many of my friends and peers seem to be moving all over the country and to new cities year after year. A home purchase signals a commitment to a particular location, and that seems to be a decision that my generation is not interested in making yet.”
A lack of financial literacy might also be holding young homebuyers back, adds Trench. “Paying rent is by far the most expensive way to live in most situations,” he says. “It takes at least a basic financial background to understand that paying down a mortgage, benefitting from price appreciation, and the myriad of tax advantages available to the owners of real estate make ownership far more powerful financially than renting. Many of my peers haven’t even thought about those things, and thus build no home equity.”
This isn’t to say that the younger generation is barred from getting a home, but it is important that the tackle buying their first home strategically, for these problems aren’t going away any time soon.