Should Millennials Buy Their First Home or Keep Renting?
Owning a home is a dream for most millennials. Unfortunately, the state of the economy today doesn’t often allow for this dream to be fulfilled. The job market remains weak, and student debt is increasing exponentially. These factors put owning a home on the backburner for most millennials. Even as they find better-paying jobs, earn supplemental income through easy side hustle and money making apps, millennials are encountering an unfortunate reality: the housing market today has the fewest number of homes available for sale on record!
A healthy housing market has approximately a six month supply of homes. As it stands though, the supply of homes would be exhausted in merrily 3.5 months. According to an article in the Washington Post, entry-level housing (which entails the homes millennials can most afford) has been particularly scarce. The D.C. region has less than a 90-day supply of condos costing between $400,000 and $600,000. In the Dallas area, barely a one-month supply of those homes are for sale.
There are many factors that contribute to this shortage of homes. Primarily, most housing experts blame low inventory on builders themselves. Builders drastically scaled back after the recession, and the housing momentum hasn't picked up enough since then. The slow rise in housing starters isn't enough, and construction still remains far below healthy levels. According to Robert Dietz, chief economist of the National Association of Homebuilders, “The challenge is really adding inventory at the entry-level space.” Given the rising costs associated with land development, wages, and land, it becomes difficult for builders to add affordable inventory at a cost that would meet first-time buyers’ or millennials’ expectations.
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Do millennials want to buy a home?
The sad part is that millennials still aspire to buy a home, and definitely expect to own a home one day. Among people ages 25 to 34 who rent, 93 percent say they are likely to buy a home someday, according to The Demand Institute.
Even though the ideal of homeownership is great, a lack of planning or premature decisionmaking can make it an absolute nightmare. In reality, the cost of homeownership doesn’t simply stop at a mortgage. Insurance, utility bills, fixing household problems and property taxes are just the tip of the iceberg. Even with the aid of property tax loans and tax-deductible payments, the costs do add up.
Millennials are quick to get lured in by the appeal of getting closer to owning an asset every month. However, an article in The Guardian warns millennials of getting sucked in without adequate thought. Often millennials will stretch themselves financially to pay off mortgage loans in the hopes that their income will significantly rise. Unfortunately, this rarely happens in a decent enough timeframe, leaving their personal finances in a state of mayhem. In fact, relative to earlier generations, today’s cohort of young people is making less money, considering their education; they are more indebted with student loans and are likely to be underemployed and finding alternative methods to flip money.
Should millennials rent or buy their first home?
Considering one’s stability is probably the most important factor to consider when deciding whether to buy or rent, especially at a time then are less than sufficient houses out on the market. According to The Guardian, “That means how stable their job is (and how likely they are to get promotions and raises over the coming years), how stable their relationship or marriage is (is there a risk that they might have to sell the house at a bad time in the market because of a divorce or split?), and how stable their career path is (might they move cities or states to work for a different company or attend graduate school?)” If there is even a little doubt while answering these questions, and the slightest possibility they may not be staying in that house for five or more years, then buying is a poor decision. In fact, divorce and loss of income are two of the top five causes of financial distress that lead to foreclosure.
So what does this mean for the average millennial? Well, for one, millennials should definitely NOT entirely give up their dreams of buying a home. Rather, it means they should wait to buy, when the housing market picks up again and there are more options that are suitable to first-time buyers. This would allow for more flexibility, better suiting the millennial money lifestyle.
Brian Meiggs is the founder of My Millennial Guide, a website aimed to help people take control of their financial lives. When not helping others reach their financial and career goals, Brian can be found at the gym, traveling, crossing items off his bucket list, or exploring Washington, DC!