Is Buying a Home Possible for Millennials?
Millennials are often associated with negative connotations such as lazy, entitled, and financially risky. Because millennial renters are the younger generation out of the four defined as millennials, Generation X, Baby Boomers, and the Silent, they might not be as financially prepared as previous generations. Or that is the myth at least.
Millennials are born in the year 1981 to 1996, clocking in at ages 21 to 37. The majority of millennials are currently renting a home due to financial and lifestyle choices. Is buying a home possible for millennials?
The twenty and thirty-somethings of today are making a nearly-identical median household income as baby boomers did at the same age. Everyone was on their newspapers back in the day. Today, the newspaper is replaced with the smartphone. The media labeled baby boomers and are just as hard-working, competitive and savvy.
The American dream of homeownership is also real for millennials. According to the New York Times, of the 35 percent of home buyers who are buying a home for the first time, 74 percent previously rented. In a separate survey of 24,000 millennial renters found 80% of millennial renters wish to eventually buy a home. Through purchasing a home, renters can go from spending money they will never see again to building long-term equity in an appreciating asset.
Young people don’t want to just buy entertainment and travel. They’re getting older and want to achieve the homeownership dream.
So is the American dream still within reach for the millennials?
If you are a millennial, the path to homeownership is fraught with challenges. From the chart, we see that the top reasons pertain to credit score and affording a down payment.
In the following sections, we aim to demystify the purpose and challenges of buying a home.
Purpose of Buying
You may want to purchase a home as a residence or as a “buy-and-hold” passive income investment property. Another type of investment is “fix-and-flip” where you invest in a property and subsequently renovate key features to increase the property’s value and quickly sell for a profit. Before committing to saving for a home, consider and write down what are your objectives in buying a home–this will inform your savings and search strategies.
Related: How Renters Can Fight High Rent Increases
How Much to Save for a Home
The latest savings statistics for 2018 shows that the average American only saves around 2.2 percent of their income a year. In other words, it takes the average American 45.5 years to save just one year’s worth of living expenses.
A recent report found most non-owners believe that buying a home makes sense when you’re income is over $50,000.
Across the US, renters who are buying homes today are saving on average $25,000 to afford the typical 20% down payment needed on a starter home costing approx $175,000.
Depending on your purpose for buying a home and your preferences of where you dream to own this property, we are looking at a $2000-3000 monthly savings.
Assessing Cost of Living
Nearly a decade after the 2008 recession, most of the U.S. has fully recovered. As a result, the country is experiencing a rise in the cost of living, especially as home prices return to and surpass pre-crash levels.
Two recent studies analyzed over 100 major U.S. cities to find out where living cost increases are making the biggest impact. It identified cities with the biggest cost of living increases over the course of 2017 and determined which cities are expected to have the biggest increases in 2018. It is seen from the map below that cost of living is the main reason for fewer savings in a majority of U.S states.
You can navigate cost of living per location by through planning.
Planning the location
Proper location planning will save you money. There are many ways to decide your preferred location. You may prefer to buy a home in a neighborhood that is closer to amenities like hospitals, schools or workplace. The travel time and cost must be taken into account.
If you are unable to afford a place that has all the essential amenities nearby, you should prioritize the most important cost-effective preference. Though the initial investment in key neighborhoods is higher, you will enjoy the greater appreciation of home value down the path. A right investment at the right place and time is well worth the effort.
As a millennial buying a home, you must consider all the costs involved and implications for both short term and long term that includes mortgage rates, appreciation, maintenance budget and property management. Make sure that your income accommodates all these expenses as many millennials end up in financial trouble and debt as a result of improper financial planning and overstepping budget.
Searching For Your Home
As a millennial, the search for your dream home starts by calculating your gross monthly income, total monthly debts, investment budget, miscellaneous expenses and balance savings. This helps you filter homes that fit your requirements. Search in trusted and verified real estate listings and research the neighborhoods.
Once you find a home that matches your taste and requirements, talk to the neighbors. Sometimes you never know all about a property history until you talk to neighbors. But bear in mind that you cannot make decisions based on one person’s account. It is better to get opinions from 2-3 neighbors for better judgment.
It is important that you feel comfortable in all aspects of the property. If something bothers you, it is always better to take a step back and ask questions. Lots of questions clear lots of things. The problem with many home-seekers is impatience. Studies show that the average time spent searching is approx 2 months and an additional month for all transaction and move-in procedures. This is absolutely normal and nothing to be nervous about.
How to Ensure Transaction Safety
Before you make an offer:
- Have your agent check for unpaid property taxes and verify the owner. Determine your offer price and contingencies. The most common contingencies include:
- Appraisal contingency: Allows you to cancel the purchase agreement if the home does not appraise for the purchase price.
- Financing contingency: Allows you time to secure financing for the home purchase.
- Litigation Issues: Check for any previous or pending lawsuits on a property as a way to gain leverage in negotiation, or avoid the property altogether. Start by contacting the county office where the property is located. For any pending litigation, the moving party’s attorney will record a Lis Pendens (Pending Litigation). You can also check online court databases and contact the homeowner association or neighbors.
- Structural or Zoning issues- If the property is encroached or has structural or zoning issues it is best avoided.
- Neighborhood issues- If you hear a neighbor’s dog barking continually when you are at the showing or any other environmental disturbances be it sound, smell or safety issues, run. Also make sure that the neighborhood is safe with quality schools and other essential facilities.
Make an offer when you are ready to commit to buying a house.
Post-Offer: After your offer has been accepted, here’s what you do:
- Provide a copy of your purchase contract to your Loan Officer ASAP and hire a Home Inspector. Get the home appraised and lock or float your loan rate. Select HOI policy and make purchase funds available. Complete final walkthrough.
Renter’s Guide to Ownership
From the stats shown below, we can see that the median age for a current homeowner is 57 years old with a median household income of $62,500.
Have you considered homeownership options available for millennials renting with meager savings? Can they not afford a home? Is there no better way to save rent paid month after month going down the drain?
The answer is yes. If you’re renting now but planning to eventually buy a home, burning 35 to 50 percent of your income each month on rent does not always feel like the best way to save for your future. In a traditional rental situation, you will never see a penny of your rent come back to help you in the future. Instead of building equity in a home you own, you get short-term convenience at a steep price.
Onerent is pioneering a new way to rent with the launch of a first-of-its-kind product named “Poplar Street”. When you sign up for Poplar Street, you can earn 20 percent back on each month’s rent payment as a credit towards buying your first home. By saving a portion of your rent for a future home purchase, you get the convenience of renting plus the tools to build equity in your future home purchase.