3 Reasons Millennials Are Not Interested in Mortgages
Despite the fact that, on average, renters pay up to twice as large a percentage of their monthly income for housing as homeowners do, the millennial generation is not pursuing the traditional American dream of home ownership to the same extent as previous generations. Homeownership dipped to 48-year lows in 2015, and millennials are waiting longer, six years on average, to make the move from renting to first home purchase. The average time span from renting to buying one's first home in 1980 was only five years. Realtors and others in the housing industry are puzzled over the delay in buying homes.
While there is disagreement over the main reason, the following factors are often cited for the slow rate of home buying by the millennial generation.
Changing Social Trends
The millennial generation exhibits two important social characteristics that differentiate it from previous generations. The first major social shift is that the number of young adults living with their parents, a number that increased again in 2015, is higher than in past generations. Nearly a third, or 31% specifically, of young adults up to the age of 34 who aren't either married or co-habitating with a significant other are living with their parents. The second major social change is the reluctance of millennials to marry, the continuation of a fairly long-term societal trend. This is an important point, since marriage is often a major impetus for home buying.
Certainly one major factor is the sheer unaffordability of home prices, combined with a stagnant wage market. The median home price has increased roughly $40,000 from the median price in 1990. Over the same period, median income has only increased by approximately $2,000. Exacerbating the situation is the fact that millennials appear to flock to some of the most unaffordable housing markets in the country, such as New York and San Diego. Urban amenities are near the top of the list of living condition qualities sought by millennials, but major urban centers and affordable housing rarely coincide. Jed Kolko, economist at real estate firm Trulia, states that less than 30% of the available housing in such major urban centers is within the affordable price range for most millennials.
The Money and Credit for Buying a Home
Because of an overall decline in home buying and a consequent increase in renting, the demand for rental space has caused substantial increases in rental prices. 2015 marked the 11th year in a row that home ownership in the United States declined. Having to pay higher rents makes it more difficult for millennials to save up the necessary money to make a down payment on a first-time home purchase.
Millennials also typically lack the credit credentials required to obtain a mortgage. Stricter credit standards that have been imposed in the wake of the 2008 financial crisis are a major impediment to home buying for millennials, a majority of whom fall short of the requisite 750 credit score that is the median for home loans backed by Fannie Mae, one of the major repurchasers of home mortgages from lenders.
Another factor is that millennials appear to lack basic home-buying knowledge regarding income, down payments, credit scores and financing options. In a survey conducted in 2015 by Fannie Mae, nearly half of adults aged 25 to 34 admitted that they didn't know what lenders expect from potential home buyers, and nearly three-fourths of them were ignorant of things such as lower down payment options in the neighborhood of 5%, as opposed to traditional figures of 10-20%.
Student Loan Debt Is Not a Reason
Although some may suggest large student loan debts as a major deterrent in home buying among millennials, statistics do not appear to corroborate this assumption. A study by Zillow Group Inc. (NASDAQ: Z) found home ownership percentages rising in accord with education levels, even when the education was accompanied by increased student loan debt. Additionally, a 2015 study by Harvard’s Joint Center for Housing Studies found that less than 10% of households repaying student loans had an overall high level of debt.