Why is homeownership just out of reach for most millennials?

Homeownership – a cornerstone of the American dream – has become a challenging puzzle for a entire generation. The question looms large: Is owning a home still a realistic aspiration for millennials? As a player within the mortgage industry, and a millennial myself, I constantly encounter this concern, not just in my professional life but in conversations with friends and family as well. Escalating housing prices, daunting down payments, and the shifting financial landscape make for a complex equation to solve. Through this article, I hope to shed light on these concerns, so that we, as a community, can better navigate this new housing landscape together.

The housing affordability crisis

Home prices in the U.S. have seen a staggering increase of over 30% since 2019, with the median home price in the first quarter of 2023 soaring to $436,800 from the $329,000 price in 2020. The steep price tag of a home presents a formidable barrier to entry for potential buyers, especially when considering the requirement for a down payment. Traditionally, this down payment often amounts to 20% of the home price, a daunting figure that many young buyers struggle to accumulate.

However, the issue isn't as simple as high home prices alone. Millennials grapple with the highest income-to-debt ratio among all generations, with young millennials averaging a Debt-to-Income (DTI) ratio of 37.5, and older millennials averaging a DTI of 36.7. Despite an average millennial household income of $69,000, according to the Pew Research Center, the burden of their debt coupled with the pressure of rising living costs and inflation makes homeownership an increasingly elusive dream.

The National Association of Realtors suggests that while young buyers can often manage recurring mortgage payments, even at the higher payments, the requirement for a hefty lump sum down payment is the true barrier to entry into the property market. This economic hurdle has led to a significant shift in how we approach homeownership. These days first-time homebuyers are delaying this milestone longer than ever before. They're typically waiting for an average of 5 to 7 years more than they did three decades ago, according to a recent report by the Urban Institute. This delay reduces the window for home appreciation before retirement, adding yet another piece to the complex financial planning puzzle.

How are buyers coping with current market conditions?

The effects of this affordability crisis run deep, echoing across our personal and financial lives. To afford a home, many young adults solicit a co-borrower or seek financial help from their parents. While these strategies may provide temporary solutions, they can bring about emotional ramifications, typically manifesting as feelings of guilt or indebtedness.

Given these circumstances, it's not surprising that many potential homeowners are reassessing the merits of buying a home. With the cost of renting in many cities closely paralleling mortgage payments (without the intimidating prospect of a down payment), it's a question that demands mindful deliberation.

It's important, however, to take a step back and view homeownership from a longer-term perspective. While the short-term financial commitment may seem daunting, purchasing a home isn't typically a short-term investment. If the plan were to buy, then sell in a short period, the equity gains could be negligible, potentially rendering the purchase a less-than-stellar investment. Yet, the average primary residence buyer remains in the home for at least 6 to 10 years, during which the equity accrued could be equal to, if not more than, the initial purchase price. Essentially, this equity buildup could result in homeowners "living for free" over the long term.

Moreover, the additional benefits of homeownership – such as tax deductions and the potential to use the home as collateral towards further investments – tend to eclipse the initial financial burden. Yet, the decision to buy a home should always be balanced against our financial stability, career security, and long-term life plans.

The older generations had it easier - comparative analysis of home buyers

The landscape of homeownership in America has undergone a significant transformation over the last decade, most notably reflected in the changing demographics of first-time homebuyers. A decade ago, the typical first-time homebuyer was in their late twenties or early thirties. Fast forward to today, and we find that the age of first-time homebuyers has steadily crept up, with many only stepping onto the property ladder in their mid to late thirties.

When compared to their Gen X and Baby Boomer counterparts, the homeownership journey for Millennials paints a starkly different picture. A report by the Federal Reserve Bank of St. Louis unveils a significant discrepancy in homeownership rates between these generations. It reveals that Millennial homeownership is around 8% lower than that of Gen Xers and Baby Boomers when they were of the same age.

However, it's not just a matter of delayed timelines. If we delve into the reasons behind this trend, we find a complex interplay of socio-economic factors that distinguish the Millennial generation from its predecessors. As stated by the Business Insider, Millennial households are earning more than previous generations did at the same age. Yet, when this earning potential is weighed against the backdrop of escalating home prices, burgeoning student debt, and the increasing cost of living, the seeming economic advantage dissipates.

It's clear that the income-to-home price ratio has dramatically widened over the decades. A study by the National Association of Realtors found that home prices have increased by a staggering 60% over the last 20 years, while incomes have lagged, only rising by 36% in the same period. The widening gap between income growth and housing cost inflation has made the prospect of homeownership an increasingly steep climb for Millennials, notwithstanding their higher earning potential.

The impact of Covid-19 on home prices

The Covid-19 pandemic didn't spare the housing market. It fueled a surge in home prices as many traded their city apartments for suburban homes. Even accounting for modest inflation and expected appreciation, homes should expect to appreciate by approximately 47% over 7-10 years, however, after slow growth we saw home prices soar by 45% between December 2019 - June 2022. As a result, young homebuyers, already wrestling with affordability issues, found themselves competing in an inflated market.

How do we make homeownership more accessible?

Indeed, the transition towards accessible homeownership demands swift innovation in the mortgage industry. With the affordability issue looming large, especially for young homebuyers, it is essential for lenders to adapt to the fast-paced economic environment and evolving financial realities.

Innovation is key, especially when it comes to making down payments more feasible. The 40-year mortgage, for example, reduces monthly payments by spreading them over a longer period. Likewise, the introduction of crypto mortgages allows homeowners to leverage their digital assets to finance down payments, paving a new path toward homeownership for those immersed in the digital economy.

However, the industry must move faster and continue to push the envelope. Lenders must pioneer solutions that are tailored to the needs of modern homebuyers. The goal is to ensure homeownership remains an achievable dream, and the onus falls on the mortgage industry to drive this change. Let's join forces to accelerate innovation and build a more inclusive housing market for the benefit of our customers and communities. The future of homeownership depends on our collective action today.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.