By age 30, 42% of millennials own homes. This sounds okay until you get the context.
For Gen X and Boomers, these numbers were 48% and 51% respectively. Millennials have the lowest rate of homeownership in generations.
Instead of buying homes, most millennials are renters.
Why is the homeownership rate lower for millennials than for previous generations, and how will this affect real estate markets in the future?
Why Aren’t Millennials Buying Homes?
The main reasons millennials aren’t buying homes are affordability, limited housing supply, lack of suitable starter homes, and less desire to buy a home.
Let’s take a closer look at each of these.
Affordability issues can be highlighted by 3 major challenges:
- High home prices
- Low median incomes
- Down payments & closing costs
The biggest reason cited for millennials not buying homes is that homes are not affordable for them.
Most millennials are caught in a situation where home prices are rising faster than their income, leading to home prices that are always just out of reach.
Ideally, mortgage payments should make up a max of 25% of your monthly income. If a mortgage payment would make up significantly more than this, it could be difficult to be approved for a mortgage at all, even if you’re already paying rent that’s more than your mortgage would be.
Median Incomes Stagnating
Median household incomes in the US were $67, 521 in 2020. This was lower than 2019’s median income by just over $2,000. While median household incomes are lowering, home sale prices in the US have seen a dramatic increase since 2020.
Home Prices Rising
In the first quarter of 2020, median home sale prices were $329,000. By the first quarter of 2022, this had jumped to $433,100, with continuing upward momentum.
Down Payments & Closing Costs
Because home prices are increasing, down payments are also increasing along with closing costs. Down payments remain at a standard 20% of the home sale price. Even with federal and state down payment assistance programs, most millennials still have difficulty saving up enough for a down payment.
Closing costs also contribute to affordability issues, since closing costs usually equal 3-6% of the home sale price. Some sellers allow for closing costs to be rolled in the sale price, but it’s not always possible.
Homes that are affordable for many millennials may not be located close enough to where they want to live and work.
Although some percentage of millennials would be willing to relocate for more affordable housing, most are not willing to go to extreme lengths to find a more affordable home.
Home supplies are tightening around the country, with the worst shortages in starter homes. This type of real estate is disappearing quickly, mostly due to rising land prices around populated areas. Because land is more expensive in metro areas, it’s harder to turn a profit with a starter home than it is with a large multifamily complex or high-end housing.
First-time homebuyers may not find the type of housing that suits their needs, making it more difficult to buy a first home.
Some millennials are not in a phase of their life where they want to buy a home, or they’re simply not interested in ever owning a home.
Millennials are marrying and having children later in life than previous generations. These milestones are usually triggers for buying a first home, meaning millennials are feeling less pressure to buy homes as early as Gen X or Boomers.
Although millennials aren’t buying homes as early in life as previous generations, there’s still a large generational desire to buy a home if the opportunity arises.
While some millennials are renting by choice, many are waiting for the right circumstances to buy their first home. When the right type of housing pops up for the right price, millennials are willing to jump in and become homeowners.