The little house with the gabled windows and white picket fence might not be the dream of the next generation. But perhaps it should be.
For baby boomers, home ownership was a yardstick for success; accordingly, they now inhabit some 32 million of the nation’s homes. But for the 80 million millennials, who number almost as many as the post-war boomers, buying a home may not have the same appeal.
To be fair, part of the reason millennials may delay the purchase of a home is due to the astronomical burden of student loan debt, which can hamper the debt-to-income calculation required by mortgage lenders. And, millennials – also called the boomerangs – often are finding lodging back at their parents’ homes as they search for employment. Renting, too, means that they are free to move from city to city in pursuit of the best jobs.
Partly, though, the differing aspirations can be explained by upbringing.
Millennials epitomize a culture raised on technology that provides instant communication, instant feedback, instant gratification, and a limitless network of business and social contacts. Faced with an unending array of choice and possibility, and access to ever-improving technology and cutting-edge gadgetry, is it any wonder that this age cohort prefers to rent rather than buy, to be flexible in location and type of dwelling as it pursues myriad and fluctuating interests?
Why shouldn’t millennials favor vibrant life experiences over stability and predictability?
According to one self-made millionaire and financial guru, not investing in real estate is the single biggest blunder millennials will make vis-à-vis their wealth. That opinion is supported by statistics that show the wealth of homeowners is 31 to 46 times greater than those who rent. And data from the Federal Reserve’s Survey of Consumer Finances shows that median homeowners had nearly $200,000 in net worth versus the median renter who had just over $5,000, with the average value of homes set at $170,000.
It comes down to simple math: an average $1,500 per month over 30 years totals well over half a million dollars. For high-ticket areas like New York City, where rents are rising, that number skyrockets. For some, it may be better to invest that money on a mortgage and, by retirement, own the property.
The important thing is to get into the real estate market as a first-time buyer, even if the house is small or needs renovations and isn’t a “dream home.”
Some tips: Don’t buy unless you are willing to live in the property for more than five years. Put down more than 10% so your loans will be smaller; accept a loan of 20% less than a bank is willing to offer.
Basic common sense also dictates that homebuyers should consider not just the purchase price and mortgage on a home, but property taxes, insurance, maintenance, utilities and repairs.
Potential buyers will likely face more obstacles in the purchase process than boomers once did. Since the housing market imploded in 2008, lenders now have stricter processes for approving mortgages.
Exhaustive paperwork and documentation, including income filings and tax statements, will be required, as will proof of savings to at least temporarily cover mortgage payments in the event of a loss of income.
Mortgage rates have risen over the last few months with a 30-year fixed rate recently reaching 4.32 percent, the highest level since 2014, and economists predicting that the rates will continue to rise.
According to the National Association of Realtors, the inventory of homes is dwindling, with fewer than two million homes on the market as of last November – almost ten percent less than a year earlier. The Association says that buyers can expect more competition for homes, especially in more affordable markets.
Baby boomers who are ready to downsize are scooping up many of the nations’ entry-level homes, from single-story ranches in family-friendly gated communities to modern flats and condos designed for young professionals. So millennials who want to jump into the real estate market shouldn’t wait too long.
Mark Seruya is a Managing Director with Sage Wealth Management at Morgan Stanley Private Wealth Management in New York City. He can be reached at 212-903-7699 or [email protected].