Homeownership For Millennials: Rent vs. Buy

Homeownership For Millennials: Rent vs. Buy - Texas Trust Home Loans

Housing is gradually taking center stage as more millennials getting married, starting their families, and earning more.

According to the Urban Institute, “In comparison to Gen Xers and Baby Boomers, millennials have a higher number of college graduates, but still, they are less likely to own a house.  As a matter of fact, at the same age, their homeownership percentage is 8% lower than Baby Boomers and Gen Xers.”

According to a study: delayed marriage, student loans, and choosing to live in high-cost cities are some significant hurdles to homeownership. What confuses analysts is that in many high-cost cities, the cost of buying vs. renting a house is almost the same. 

The median home prices and median rent in cities with a substantial millennial population didn’t show significant disparities, according to an analysis by CoreLogic. As a matter of fact, in numerous real estate markets, the renting amount is the same as the monthly mortgage amount at the current 4.5% interest rate. Although, you should keep that in mind that purchasing a home can involve more than just monthly payments, and payments like the downpayment amount and maintenance costs can be a barrier as well.

The bigger the city, the bigger the paychecks, and the bigger the price tags

People generally earn more in bigger cities, but they also have to bear higher living expenditures and higher housing costs.

One general financial rule is that you should spend under 2.5 times of your gross income on your home. It means that if your family earns a total of $80,000 every year, you should not purchase a home that would cost you more than $200,000. This could be very challenging or even impossible in locations like Boston and San Diego.

According to Richard Green, director of the USC Lusk Center for Real Estate, “Your cash flow out should be no worse than what you would pay in rent. Now, if you’re paying 50 percent of your income in rent and 45 percent in a house, then I’d say looking at a house is probably worth it.”

“Three years ago, when interest rates were lower, buying was better from a cash-flow perspective than renting was. But, now that interest rates have gone up, that’s not the case anymore.”

It’s tough for millennials to bear up-front costs

It’s tough for many young homebuyers to pull together a down payment, even if you can afford monthly payments.

According to Polly Donaldson, director of D.C. Department of Housing and Community Development (DHCD), “Millennials make up 35% of the population in Washington, D.C., and programs like Home Purchase Assistance Program (HPAP) are popular with young families and singles. “

To eligible residents program, HPAP offers up to $80,000 in financing and up to $4,000 for closing costs. Moreover, you don’t have to pay these interest-free loans immediately.

Seattle is one of the highest-priced housing markets in the country and is both expensive and millennial dense. While finding an affordable home, there is no easy feat as the median prices for homes are $550,000. Even though there are programs that provide down-payment assistance, they only go so far in a place where property values are excessively high for the majority of the homebuyers.

According to Jennifer LaBrecqueprogram manager for the City of Seattle Sustainable Homeownership & Weatherization program, “the city has remained really committed to helping first-time homebuyers, but we’ve also recognized that even our down-payment assistance programs are a challenging model.”  “We provide $55,000 in deferred down-payment loans to buy a home, but if you look at what a low-income person can afford and what a house costs, that money goes toward closing that gap but not all the way,” she added.

The down payment is the start; buyers should also consider property taxes, applicable association fees, insurance, and repairs. The average cost of homeowners insurance is $1,083 nationwide as per ValuePenguin.

Even though homeownership is very appealing for several reasons, Green says, it might not be the right option for everyone. Below are some questions you should ask yourself before buying a house:

In the next 5 to 10 years, where will you be?

According to Ilyce Glink, author of “100 Questions Every First-Time Home Buyer Should Ask”, you should consider renting if you’re not planning to remain in the same home for at least the next five years. This real estate principle is known as  “the 5-year rule”.

According to Glink, “It’s really hard to break even in less than five years unless you buy a really ugly property, fix it up, and the market is right, then you might get lucky and make money. But you can’t count on it.”

Selling a house is expensive, so it usually takes five years or more to get ahead. If you sell too quickly, you won’t be able to offset your closing costs as home values typically don’t increase fast enough. If you haven’t built enough equity, these costs can harm your outcome.

 “In the end, buying and selling are going to be about 10 percent of the value of the house right there — it could even be more than that,” says Green.

This five-year rule is particularly crucial for young buyers who are confused about whether they want to start a family, have more space or switch careers.

If you’re a millennial and want to live in the same home for many years, the opposite is true for you. It would be best if you seriously considered buying a home because, in time, the property’s value will likely increase.

“You still have to pay to live somewhere. For most Americans the biggest portion of their net worth, where their retirement cash will come from, is in their house,” says Glink. “And the way they get there is by paying down their mortgage every year, the faster, the better. What they do — without even thinking about it — is they stockpile this huge amount of savings. That’s where homeownership becomes a better deal.”

Have you set up an emergency fund?

When you rent, you have the advantage of the fixed costs associated with renting and are relatively cheap when compared to homeownership. You don’t have to stress about costly repairs when you’re renting.

As per Green, “You need to make sure you have some money put away if a furnace or an HVAC system dies. That could be $10,000 right there. Boom.”

“You have to ask yourself: do I have access to that kind of money? The driveway needs paving. The roof needs replacing. And even in good homes, these systems wear out every 15 to 20 years,” Green added.

If you don’t have emergency funds, then you run the risk of increasing your debt by taking out loans or using credit cards. Thus it can reduce the financial benefits of ownership.

What are millennials willing to sacrifice to become homeowners?

According to Glink, “Owning a home costs money and millennials are very focused on experience. That includes eating out or traveling for everybody’s weddings or international travel. Are you prepared to give that up? Are you prepared to give up your weekly massage? What are you willing to trade-off?”

Do you need stability or flexibility?

Your way of living is another factor that can decide whether as a homeowner, you’ll be happy or not. Homeownership can be a problem for you if you’re the kind of person who doesn’t want to be pinned down to one city.  If you have to sell your home first, it can be difficult for you to accept a job offer in another state.

Conversely, it’s comfortable to know that a landlord can’t evict you if you’re living in a specific area for many years and your monthly housing payment will stay relatively constant.

As per Glink, “When I talk to millennials about renting or buying there’s the issue of timing, and there’s the issue of money. Moreover, timing is everything. They have to ask themselves: ‘Am I going to be switching jobs and moving cities? Do I want that kind of flexibility? If they do want flexibility because they’re still figuring out where they want to live, then renting is a good solution.”

Are you thinking about starting a family?

Homeownership has other non-financial advantages like picking a place that’s quiet for a family. Priorities will probably shift for the millennials who are planning to start a family. For them, neighborhoods with good schools and child-friendly facilities might be more critical instead of great nightlife.

According to Green, “The other reason to buy a house is if you have kids and want to keep those kids in that house for a long time, which is actually good for kids. That’s a big reason that buying is better than renting.”

Advantages and disadvantages of buying

Advantages:

  • You can make additions and improvements according to your needs
  • Greater privacy
  • You have the freedom to live as you wish
  • Stability
  • Your landlord can’t ask you to move or increase your rent
  • Homes typically increase in value, build equity and provide a nest egg for the future
  • Tax benefits
  • If it’s a fixed-rate loan, your monthly mortgage payment remains constant

Disadvantages:

  • The high cost of homeownership
  • Repairs and maintenance
  • You have to pay property taxes
  • Decreased mobility
  • Possibility of foreclosure
  • There are no guarantees that your house will increase in value.  Changes in the market and other factors can cause the value of your home to decline.
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