Will Millennials be forced to rent for life?
Millennials must pay off their debts and save for a down payment in a difficult job environment or they will never become homeowners.
Historically, people who rent their primary residences break down into two categories: (1) those who value freedom, and (2) those who don’t have the financial discipline to save for a down payment. Those who value their freedom to pursue job opportunities or other reasons should not anchor themselves to a piece of real estate. At some point their life circumstances may change, and they may wish to become homeowners, but until that change happens naturally, they will remain renters.
During the housing bubble, lenders and politicians on the left believed they found a panacea with 100% financing because it removed one of the primary obstacles to home ownership. Unfortunately, the experiment with widespread 100% financing ended badly because with no personal investment in the property, the new “owners” lacked the financial skills and the discipline necessary to sustain homeownership, particularly when times got tough.
Apparently, saving is not a barrier to home ownership; saving is a requisite skill necessary to sustain home ownership.
During the housing bubble, few renters were saving for down payments because they had no need, and after the housing bubble burst, the Great Recession caused many to deplete their savings to sustain the lifestyles they were accustomed to. Further, since the federal reserve lowered interest rates to zero, beyond the emotional need to reserves to reduce stress, people had little or no incentive to save; thus American’s are broke.
The end result of the lack of saving over the last 10 to 15 years is that few potential homebuyers possess enough savings to cover either the 3% down payment on a GSE loan or a 3.5% down payment on an FHA loan. And since renters are putting a large percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment.
No down payment, no sale.
This problem is most acute among Millennials who are also struggling with enormous student loan debts. Large debts and small savings is not a recipe for big home sales numbers, and the near-record low first-time homebuyer participation rates back this up.
Prashant Gopal and John Gittelsohn, March 25, 2015
(Bloomberg) — Americans in their 20s and early 30s are getting a nudge toward homeownership a decade after sales peaked during the housing bubble. It’s not their nagging parents. It’s rents. They’ve risen so much that buying is making more sense.
“I pay $1,410 in rent for my one-bedroom apartment in downtown Denver,” said Eric Arther, 28, who has saved about $30,000 for a down payment. “If I pay that much, I’d like to build some equity.”
Purchases by younger buyers are likely to grow gradually as millennials work through hurdles such as student debt, lack of down-payment funds and later family formation than previous generations, according to Jed Kolko, chief economist for real estate website Trulia, a unit of Zillow Group Inc.
“We are at the beginning of a multiyear period where more young people become homeowners,” Kolko said in a telephone interview. “But I think it will happen more slowly than most people expect.”
First-time buyers made up 29 percent of existing-home sales in February…. The share of new buyers fell last year to its lowest level since 1987, according to the group.
I believe this will also happen slower than most expect because nearly everyone who analyses real estate is blinded by their own optimism bias. Millennials have real problems with excessive student loan debt and a lack of savings. Short of a massive bailout from the US government, those debts won’t disappear overnight, and even if they did, savings doesn’t appear my magic either.
“We’re just now hitting the point that the oldest of millennials are in their early 30s, which would be about time for them to make those moves,” Willett said. “The question is, do they have money for a down payment?”
Obviously, they don’t.
About 17 percent of parents with millennial-aged children say they expect to help, or have already helped, their kids buy a home.
A growing number of homebuyers are expected to turn to the big bank of mom and dad to help finance housing purchases, according to a report released Tuesday by loanDepot consumer lender.
About 17 percent of parents with millennial-aged children – which loanDepot defines as individuals between 18 and 38 years old – expect to help their kids at some point in the future finance a home purchase. And a reported 13 percent of parents have done so in the last five years.
But only 19 percent of millennials aren’t expecting to receive any financial help from their parents, according to the report.
While on 19% may not expect financial support, upwards of 80% won’t get financial support when the time comes. Few parents have the money, and many of those who do would rather see their children be self-sufficient. Studies show that parents who support their children also weaken them because the children remain dependent upon that support.
“Support from parents is playing a significant role in the housing recovery, and this new research indicates the trend will increase,” Dave Norris, president and chief operations officer at loanDepot, said in a statement accompanying the report. “Through the survey, 75 percent of millennial-age homebuyers who received financial support from their parents said that assistance made it possible for them to buy a home.”
The number of Millennials with parents with the cash and the desire to help is not large. While the desire may be there with some, the money probably isn’t.
Christine Romans, March 23, 2015
our generation is twice as likely to be living at home with mom and dad than shopping for real estate. In fact you’ve been out of the home-buying game since the Crash of 2008.
Only 13.2% of people aged 18 to 34 are homeowners, a record low number. An astonishing 31% of people aged 18 to 34 are still living with their parents. And men are more likely than women to still be living at home.
Millennials must really wonder how previous generations did it. The world Millennials live in has student debts they will spend a lifetime repaying, house prices so high they can never afford them, and a job market so weak they will never get ahead. It must look hopeless.
For graduates with student loans, living at home or with relatives is a smart strategy and the single most effective budget tool you have. It’s actually a no-brainer: Why give 50% or more of your pay to a landlord when you can live at home rent-free and use that money to cut your debt, build your emergency fund and save up for a home.
And party, of course. I took a year off between my sophomore and junior year of college, and I didn’t save a penny….
It might have been considered “slacker” and embarrassing for Generation X, but for millennials, it is acceptable and even wise.
For Millennials, their options were much more limited.
Assuming your finances are in good shape — you are gainfully employed, have six months of savings in the bank and money for a down payment — then the smartest money move you can make is buying a home now. Interest rates are rock bottom, but will start rising either late this year or next.
This is common advice today: buy a home because rates will go up and make owning even less affordable. This advice completely misses the fact that rising mortgage rates may force house prices lower, something Millennials know is possible because they witnessed the housing bust.
Millennials need to get their personal debts down to manageable levels, and they need to save a down payment to buy a house. If they don’t accomplish those tasks, they will not become homeowners: it’s that simple. They will become renters for life.
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