Millennials and Homebuying: Myths and Reality
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Study: Many Millennials Want to Become Homeowners but Believe It’s Impossible
A common narrative in our age is that millennials are breaking with the habits of their parents and grandparents when it comes to homebuying. Millennials, the story goes, are renting longer, living with their parents, and are saddled with student loan debt. In short, it would seem they aren’t interested in homeownership.
But a new NerdWallet analysis that examined a number of surveys and data from government agencies and private organizations found many of these perceptions to be false. Our research showed that a majority of millennials would prefer owning to renting, but they appear to be postponing homeownership because of real and perceived difficulties in affording it. In fact, our analysis found that millennials, those born from 1981 to 1997, look upon owning a home just as favorably as previous generations.
Facts on millennials and homebuying
U.S. millennials total 66 million individuals and 24 million independent households.
The median age for first-time homebuyers has remained virtually unchanged for the past 40 years: In 2015 it was 31 years old , compared with 30.6 in 1970-74.
Two-thirds of millennials haven’t reached that homebuying age of 31, and 22% are under 25 years old.
Millennials are renting for a median of six years before buying, compared with a median of five years for renters in 1980.
Millennials are expected to form 20 million new households by 2025.
The median income for a millennial older than 25 is $38,220.
New homeownership is down among all age groups
As a percentage of all homebuyers, the number of first-time owners has fallen significantly since the Great Recession. The National Association of Realtors report Home Buyer and Seller Generational Trends, from March 2016, shows that first-time homeowners make up 32% of all buyers — compared with a historical average of 40%. That’s the lowest percentage since 1987. Meanwhile, the number of millennials living with their parents has increased nearly 15% from 2006 to 2013.
Homeownership in general has declined across all age groups, as well. The U.S. homeownership rate was down for the 11th consecutive year in 2015 — from a peak of 69% in 2004 to 63.7% in 2015, the lowest level since 1994.
Millennials want to buy homes
A 2014 survey by housing finance giant Fannie Mae found that the majority of millennials said they consider owning a home more sensible than renting for both financial and lifestyle reasons — including control of living space, flexibility in future decisions, privacy and security, and living in a nice home. Many young renters in the survey appear to be on the brink of homebuying, and 49% said their next move would likely be to own a home.
And while millennials are more pessimistic compared with other age groups about their ability to buy a home, the majority in the Fannie Mae survey had a positive outlook about purchasing a house. At least two-thirds of young renters said that it was a good time to buy, even after the housing market collapse in the recession.
“There’s a strong indication that millennials do want to become homeowners, which is quite different from what we’ve heard,” says Chris Ling, mortgage manager at NerdWallet. “While overall homeownership has declined, millennials do see the long-term value in owning a home.”
Reasons why young renters prefer owning a home
Percent who prefer owning
Having control over what you do with your living space
Having a sense of privacy and security
Living in a nicer home
Feeling engaged in your community
Having flexibility in future decisions
Millennials are postponing homebuying
One reason millennials aren’t buying homes at the pace of previous generations is a perception that they can’t afford to own.
When young renters were asked about their primary reason for renting, their top response was that they are making themselves financially ready to own. Combined with the answers “renting is a more affordable option” and “cannot obtain a mortgage,” 57% of those in the Fannie Mae survey cited financial reasons for not buying a home. Post-college millennials living with their parents also reported not having enough income as their No. 1 reason for staying at home.
Asked what they believed were the biggest obstacles to getting a mortgage, millennial renters gave these answers, in order:
Insufficient credit score or history
Affording the down payment or closing costs
Insufficient income for monthly payments
Too much existing debt
For many millennials, the data NerdWallet analyzed reveal that these reasons may be more perception than reality.
Credit scores and stricter credit lending standards
Stricter credit standards are impeding millennial homebuyers, a majority of whom don’t meet the median credit score of 750 for loans backed by Fannie Mae, one of the biggest buyers of U.S. home loans from lenders. A third of millennials don’t meet the industry standard minimum credit requirement of 620. From 2011 to 2013, when home purchases were falling across the entire credit score spectrum, homes bought by those in the lower range of scores, from 660 to 720, dropped at four times the rate of homes bought by people with scores above that range.
Credit standards — while still historically tight — have been easing in recent years. Mortgage processor Ellie Mae saw FICO scores steadily decrease through 2015, and data from Zillow suggest that credit scores for first-time homebuyers have been declining from a high in 2010. Some loans, such as those backed by the Federal Housing Administration, a government agency that insures home loans, closed at lower scores than standard loans, with an average FICO score of 688.
Millennials are largely unaware of down-payment options
While younger renters cited a down payment and closing costs as the second-most-common reason for not buying, they may not know how much money is required. In a 2015 survey by Fannie Mae, 42% of those ages 18-34 said they didn’t know what lenders expect of them, and 73% were unaware of lower down-payment options that range from 3% to 5% of the home’s purchase price, as compared with the commonly cited lender preference of 20%. Many lenders underwrite loans with down payments as low as 0% to 6%, the most popular option for first-time homebuyers and those with lower credit ratings. RealtyTrac estimates that about 30% of all homebuyers put down 3% or less on the cost of the home.
“Many millennials believe they are unable to afford homes, when really many of them are unaware of the different financing options that exist — particularly those that allow for a down payment of 6% or less,” Ling says.
However, even a low down payment may still be difficult for some buyers. Fannie Mae and the Federal Reserve report that most millennials haven’t saved enough for the estimated $13,820 needed for 6% down on the median starter home in 2015. According to our calculations, it would take the typical millennial six years to save for a 6% down payment on the median starter home .
Debt-to-income ratio at healthy levels
Millennials living in most places in the U.S. can afford the monthly mortgage payments of the median starter home. Given the estimated monthly income of $2,940 for Americans ages 25-34 from the Bureau of Labor Statistics, and median estimated monthly principal and interest payments of $945 by Black Knight Financial Services, millennials, on average, would reach a monthly debt-to-income ratio of 32%. This ratio is within the range of 28% to 36% that most lenders look for when considering mortgage applications.
Taking into account property tax and homeowners insurance from NerdWallet’s mortgage calculator, we found a debt-to-income ratio for millennials of 37%, which is just above the high end of the range that guides lenders.
Now is also a good time to borrow. Interest rates trended down from 2008 and 2013, and have remained roughly flat at historic lows since then. As a result, median mortgage payments in December 2015 were still $380 less on average than before the housing market collapse.
Our examination of the data showed that millennials aren’t facing insurmountable debt. According to a survey by Fannie Mae, 53% of young renters had debts less than $10,000, and 10% had debts over $50,000.
The Fed’s most recent Survey of Consumer Finances found that 42% of millennial households have student debt and 35% have vehicle debt, with median debts of $17,200 and $11,000, respectively.
Student loan debt doesn’t deter homebuying
While student loan debt has surged 56% in the past decade to an average of $28,950 per borrower, this doesn’t appear to have had a negative impact on homeownership. In fact, higher education has a positive effect on homeownership, according to our research.
A Zillow analysis of the Panel Study of Income Dynamics found that homeownership increased for each successive level of education, even as student debt went up.
According to Zillow’s analysis, homeownership dropped only 2.1% when a married household with a bachelor’s degree accrued $30,000 in student loan debt. Similarly, for couples with at least one master’s degree, there was just a 5% decline in homeownership with student loan debt of $50,000. These findings were echoed by a 2015 study by TransUnion that found a 3% difference in the mortgage participation rate between those with student loans and those without.
“With student debt on the rise, there’s been a lot of speculation about whether the cost of a college degree hurts an individual’s ability to buy a home,” says NerdWallet’s Ling. “From what we’ve seen, getting a four-year degree or higher is actually positively associated with homeownership — even when accounting for debt.”
Those who did see homeownership rates decline because of student debt were millennials with student loans and without a degree, or those with student debt and an associate’s degree. When families with associate’s degrees faced debt of $50,000, homeownership rates fell 16%.
In 2013, only 8% of households repaying student loans had high debt burdens — defined by the Consumer Financial Protection Bureau as over 14% of monthly income toward debt. According to an analysis by New America, a nonpartisan policy institute, bachelor’s degree graduates with debt pay an average of $312 a month in student loans. Considering the estimated monthly income of $2,940 for a 25- to 34-year-old millennial, this is a student debt threshold of 11%, which is a medium debt burden, according to the CFPB.
But the group of millennials with student loans who didn’t earn a degree could have an impact on homeownership rates for younger people, if the trend continues. According to the Harvard Joint Center for Housing Studies, “Over half of households in their 20s and 30s with student loan debt in 2013 did not have four-year college degrees.”
Resources to help millennial homebuyers
While certain realities are restricting millennial access to homeownership, many of the roadblocks stem from a lack of knowledge about the options available to finance a mortgage.
Millennials with less-than-excellent credit have options such as Federal Housing Administration loans; the FHA works with applicants who have lower credit scores and small down payments. And some lenders are anticipating millennial demand by offering conventional loans with 97% financing.
A mortgage calculator can help first-time homebuyers research monthly payments, while a real-life affordability tool can help millennials determine how much house they can afford.
Those struggling with student loan debt may qualify for income-based repayment options or may be able to refinance their loans for a lower debt-to-income ratio.
Ultimately, barriers to homeownership may not be as high as many millennials perceive them to be. Although factors like low savings or a poor credit score might seem insurmountable, there’s a variety of resources available to help younger Americans buy their first homes.
“Millennials — and first-time homebuyers in general — should never just assume they can’t afford a home. The first step to owning a home is knowing how you can finance it, so you should always research your options,” says Ling. “Buying a home may be more of a possibility than you realize.”
A previous version of this article misstated the debt-to-income ratio for millennials. In addition, the number of years listed for which millennials rent before buying a home has been corrected to a median. This post has been corrected.