Shattering the millenial home buying myth.

Why are millenials not buying homes? The simple fact is that for some reason America’s millenial generation (or ‘Gen Y’), defined as 18-29 years old, are not buying homes anywhere near the rate of their predecessors or older generations. With roughly 66 million millenials encompassing 24 million households in the U.S., post-college and early working adults in their 20s, this group forms a huge portion of our population that are normally buying their first homes or moving to the suburbs to start families in droves.

There are several root causes that explain their choice to rent en masse, but there are also several narratives or perceptions that have come to define millenial home buying behaviors that are just not true.

In this blog, we’ll define the three main reasons that are floated for why millenials aren’t buying homes, and explore if each of them are true or not based on statistics and facts.

But first, a primer on the millenial rent-over-buy preference:

Facts about millenial home buying:

• The number of first-time homeowners has dropped precipitously since the mortgage meltdown and Great Recession. These days, first-time buyers constitute about 32% of all buyers, the lowest percentage since 1987, when typically that number is 40%.
• But it’s not jut millenials who have opted to rent in record numbers, as homeownership rates in the U.S. have fallen to around 63.7% from a 2007 peak of 69%, the lowest rate since the 1960s.
• From 2006 to 2013, the number of millenials living with their parents increased by 15%. That may not seem like a big number, but it adds up to almost 10 million people.
• First-time homebuyers have kept the same median age for the past 40 years. In 2015, the median first-time homebuyer was 31 years old, compared to 30.6 in the early 1970s.
• There is still hope since about two-thirds of all millenials haven’t reached that median 30.6 age, and about 22% of all millenials are still under 25.
• Millenials are now renting a median of six years before buying their first home.
• By 2025, millenials will form 20 million new households in the U.S.

Three popular narratives why millenials aren’t buying homes: 

1. They don’t want to buy.

2. They can’t qualify for a loan or can’t afford to buy.

3. Record student loan debt is preventing them from buying.

Reason #1 They don’t want to buy.

The narrative that millenials don’t want to buy a home is false. In fact, research shows that the majority of millenials prefer to own their own home over renting. Surveys show that millenials born from 1981 to 1997 look at homeownership as favorably as their parents, grandparents, and previous generations.

A 2014 survey conducted by Fannie Mae revealed that most millennials reported that owning a home was more sensible than renting for both financial and lifestyle reasons — including control of living space, flexibility in future decisions, privacy and security. 49% of respondents who were young renters also stated that their next move would likely be to own their own home.

Millenials may be more pessimistic about our economy and their finances compared to other generations (and for good reason, having witnessed the Great Recession and record foreclosures and bankruptcies), but Fannie Mae found that the majority of millenials surveyed still have a positive outlook about home buying. In fact, more than two-thirds of all millennial renters said that it was a good time to buy.

Renting is looking less and less attractive to millenials as time goes on, too. Considering that rents are rising at a shocking rate in many areas of the country, the portion of people who pay more than 30% and even 50% of their income towards housing is higher than ever, home ownership is less expensive than renting in many cases – a fact not lost on smart young people who have to write a check for their housing every month.

Reason #2 They can’t qualify for a loan or can’t afford to buy.

In that same Fannie Mae survey, millennial renters were asked their primary reason why they weren’t buying a home. 57% of respondents said that they weren’t buying for financial reasons.

Their answers included:

1.         Insufficient credit score or history

2.         Affording the down payment or closing costs

3.         Insufficient income for monthly payments

4.         Too much existing debt

While there are additional strains, stresses, and circumstances on the typical millennial budget, their financial situation may not be as dire as they believe. In fact, credit score standards have loosened again since the ultra-tight mortgage market during the Great Recession, and banks are offering common sense loans with options for most credit scores in the 620 and up range. A large portion of young people don’t even know what their credit score is, and it appears that they over estimate what score they’d need to buy.

Additionally, many millenials stated that coming up with a down payment and closing costs was preventing them from buying. But when asked exactly how much money they’d need to become homeowners, 42% of those ages 18-34 said they didn’t know how much money it took to buy, and 73% didn’t know about lower down-payment options that range from 3% to 5% of the home’s purchase price, like with FHA loans. In fact, RealtyTrac estimates that about 30% of all homebuyers put down 3% or less on the cost of the home.

Is it conceivable that something as simple as a misconception that they’d need a 20% down payment is holding a large number of millenials back from buying?

Reason #3 Record student loan debt is preventing them from buying.

Probably the most-cited factor for low millennial homeownership is their record level of student loan debt. There’s no denying that student loans debt burdens are higher than ever before, jumping by 56% in the last decade to nearly 1.2 trillion dollars, with the average college graduate with student loans carrying nearly $28,950.

But is that debt really disqualifying them from owning a home? Probably not, if we mind the data.

Millenials definitely have debt and monthly payments to worry about, as a recent Survey of Consumer Finances revealed that 42% of millennial households have student debt, and an additional 35% have auto loans. Their median student loan debts averaged $17,200 and their auto loans, $11,000. But the same Fannie Mae survey found that 53% of millenial renters carried debt that added up to less than $10,000, and only 10% had debts over $50,000.

But remember that student loan debts correlate to college graduates, and according to credible research, higher education rates have a positive - not a negative - impact on homeownership rates. In fact, a Panel Study of Income Dynamics revealed that homeownership levels went up for each successive level of education, even if student debt rose accordingly.

The study found that when a married household with a bachelor’s degree had $30,000 or more in student loan debt, homeownership rates dropped only 2.1%. Those with a master’s degree and $50,000 or more in student loans saw just a 5% dip in homeownership. Likewise, TransUnion found that those with student loan debt owned homes only 3% less than those without debt. This strong homeownership showing is definitely due to education levels, as these studies found that only when a household had $50,000 debt but just an associate’s degree did home ownership rates fall by a significant 16%.

Additionally, it’s estimated that only 8% of households that are repaying student loans had monthly payments that ate up more than 14% of their monthly income. According to New America, a nonpartisan policy institute, the median debt burden from student loans for millenials was only 11%.

According to the Bureau of Labor Statistics, Americans ages 25-34 earn a median monthly wage of $2,940. Black Knight Financial estimates the average monthly principal and interest mortgage payment at $945 per month based on the median home price, which would equate to a 32% debt-to-income ratio. Since the acceptable debt-to-income range for mortgage lending 28% to %36, based on these numbers, a significant number of millenials living in most places in the U.S. outside of the most expensive markets can afford to buy a house.