I was recently shown an article from CNBC titled, “Self-Made Millionaire: Not buying a home is the single biggest millennial mistake” , in which David Bach (the self-made millionaire referenced in the title of the article) is quoted saying that the biggest single mistake millennials are making is not prioritizing home ownership. Further, Bach insists, “If millennials don’t buy a home, their chances of actually having any wealth in this country are little to none”. While these remarks do hold some credence, it’s evident Bach does not understand what it is to be living in today’s world as a millennial. Additionally, the narrow scope of the article fails to examine WHY millennials are delaying home ownership; it is not simply that millennials don’t want to buy a home but many cannot buy a home.
To understand this further, we must first examine what it is to be a millennial. In the spirit of full disclosure, I must clarify that I myself am a millennial and in all fairness to Bach I must say that it seems no one quite understands what exactly a millennial is. Often the term ‘millennial’ brings to mind a skinny jeans wearing, fair trade organic artisanal cold pressed juice drinking, free thinking, hippie type who still lives at home with mom and dad in their childhood bedroom which is full of participation trophies from every event they’ve ever remotely been a part of. While there may or may not be a sliver of truth to this description, a more technical definition of the word ‘millennial’ is:
- Those between the ages of 18 and 34 (born between 1982 and 1994)
- The most diverse and educated generation to date (61% have some form of higher education v. 46% of Baby Boomers with higher education)
- Currently the largest living generation, having just overtaken the Baby Boomers (there are currently 75.4 million Millennials v. 74.9 million Baby Boomers)
As an interesting aside, it appears even the United States government was confused and intrigued by millennials, going so far as to publish a report to President Obama titled, “15 Economic Facts About Millennials”, in which the Council of Economic Advisors provided a great deal of insight into what is driving millennials to make the decisions they are making in regard to homeownership and family creation. From this report it is evident that the single event that has had the greatest impact on millennial homeownership was the financial crisis of 2008.
There is little need to delve into the events surrounding the financial crisis of ‘08 but the resulting recession arguably was and is still felt most strongly by millennials. For a large proportion of millennials, the financial crisis hit as they were entering the job market. According to the report mentioned above, “Research shows that entering the labor market during a recession can result in substantial earnings losses that persist for more than a decade with negative effects lasting longer for college graduates. Workers who start their careers in a recession earn 2.5 to 9 percent less per year than those who do not [enter the job market during a recession] for at least 15 years after starting a career.” (15 Economic Facts about Millennials). This is attributed largely to the fact that new entrants in a recession will take jobs they are either overqualified for or not suited to when they start their careers.
Combining this with the fact that more and more students facing the increasing burden of student debt, it becomes apparent why millennials have been slow to purchase their first homes. According to the department of education, U.S student loan debt reached $1.26 trillion with 44.2 million Americans or more than 66% of students graduating from 4 year colleges having student loan debt. Further, this debt averages about $35,000 at graduation. According to David Bach in the CNBC article mentioned above, “If you want to get in the game of homeownership, start by churching the numbers…A good rule of thumb is to make sure your total monthly housing payment doesn’t consume more than 30 percent of your take-home pay. He also recommends having a down payment of at least 10 percent.” If we actually crunch the numbers however we find that homeownership for most millennials simply isn’t possible:
The average millennial makes around $45,000 before taxes. If we apply an average tax rate of 25%, this leaves $33,750 in take home pay. Further, the average student loan payment among individuals 20-30 years old is $351 a month leaving $29,538. According to Bach’s rule of thumb, if 30 % of this were devoted to housing (mortgage including taxes and insurance) this would amount to about $740 a month the typical millennial could comfortably to spend on a mortgage. This translates into buying a home for about $112,000 (factoring in a 10% down payment). Unfortunately, the average home price in the United States is $192,500 (Zillow) about $80,000 more expensive than what the average millennial can afford.
This isn’t to say that all millennials can’t afford home ownership, this merely illustrates reality for many millennials. Unfortunately, even for those millennials who may be able to afford homeownership, there are still obstacles. As stated previously, many millennials entered the job market and the hallmark of their early adult lives has been the experience of establishing a career at a time of economic turmoil. As a result, even though the economy is well into recovery, millennials being among the last group to recover from the recession are still feeling the fallout and still trying to carve out a career path. For this reason, as well, millennials are delaying home ownership. When there is uncertainty about employment many millennials have found it prudent to remain flexible in order to be able to follow career opportunities they may not be as able to follow if tied down with a home, family, etc. In the report to President Obama on millennials the Council of Economic Advisors explains this saying, “Homeownership decisions are often tied to job prospects and with the labor market recovery well under way for Millennials, maintaining flexibility in their location decisions as renters can provide an advantage as they consider job opportunities.”
While this clearly speaks to the millennial mindset, a further hindrance to first time homeownership among millennials lies not in the millennial mindset but in the lending environment born as a result of the lending practices that precipitated the crisis in 2008. According to the Council of Economic Advisers, “67% of those under 30 have a credit score below 680—a lower credit score on the spectrum. With regulatory constraints leading lenders to apply additional credit overlays for those with low credit scores, Millennials are likely to face challenges obtaining mortgage credit.” Further, the report notes that survey data from the Federal Reserve Bank of New York suggests that 22% of potential borrowers with scores below 680 don’t even try to apply for mortgage credit due to:
-discouragement from prior credit rejections
-their current employment prospects
-the financial burdens of paying down more debt
From this it is evident that it is not that millennials don’t want to experience home ownership but that many are simply not in a place to be able to do so, something that should perhaps be applauded rather than disparaged. The fallout from the financial crisis of 2008 tells a cautionary tale which millennials seem to have paid attention to. Rather than rush into homeownership millennials appear to be waiting, focusing on a career, and establishing a semblance of financial stability before making the calculated decision to enter into home ownership. For those like Bach, however, who believe that, “Buying a home is an escalator to wealth” I say to you in Aaaron Rodgers fashion R-E-L-A-X. Don’t worry…we millennials will get there. It may be in our own way, and on our own time, but eventually we’ll get there. In fact, the Mortgage Bankers Association forecasts mortgage purchase volume increasing from $990 billion to $1245 billion by 2019, as millennials now account for the largest demographic we will in large part make up those who account for this increase in purchase volume and will continue to dominate housing demand, new jobs, and spending for the next several decades.