The housing market has been slow to recover from the Great Recession, and one of the main reasons why is the lack of first-time homebuyers. Millennials are more likely to rent for a longer time before purchasing a home or conclude that home ownership just is not worth the expense and debt. A new analysis by Zillow confirms this trend.
During the early 1970s, the typical first-time homeowner rented for 2.6 years before buying their first home. Zillow found that since that time, the average rental period has more than doubled to an average of six years renting before purchase. The median age of the first time homebuyer has also increased to 33. As the balance tips toward renting, U.S. home ownership has slumped to a 48-year low at 63.4%.
The resulting delay in first-time home buying has a ripple effect on the housing market, since current homeowners cannot upgrade if they do not have anyone to buy their current home. At the same time, the inventory of starter homes is low in some markets, as the same economic challenges that keep millennials from buying keep some homeowners in their starter home until they can afford an upgrade.
Why are millennials taking longer to buy their first home? Zillow suggests some reasons, and we have added a few others.
- Wages/Jobs – The economy has been recovering, but it is doing so at a slow pace. Millennials are having a difficult time acquiring the down payment money necessary to purchase a home. Increases in rental costs are increasing the savings challenge, even as inflation remains relatively low. Rental costs are rising at approximately twice the rate of wage growth.
- Choice of Rental – In some cases, millennials are renting places that are expensive enough to make saving difficult. Harvard's Joint Center of Housing Studies found that 46% of millennial renters (ages 25-34) spend over 30% of their income on rent. That may be the only housing available, or they may have decided to sacrifice earlier home ownership for a more comfortable rental experience.
- Home Prices/Inventory – Zillow found that first-time homebuyers are paying a median price of $140,238 for their first home, which is 2.6 times their median income. Prices have risen as the inventory of affordable homes has decreased. The price increases have outpaced the wage increases for most millennials, resulting in a longer time frame to build up a down payment.
- Caution – Millennials saw the effect of the housing crisis on valuations and debt accumulation and are understandably cautious about diving into the housing market without a stable income and sufficient down payment funds. First-time homebuyers now average 4.5 years in their field and three years with the same job.
- Loan Terms – Caution exists on the lender's side as well. For the most part, no-money down and piggyback loans that finance the down payment are a thing of the past. Banks have also tightened credit qualifications in response to the Dodd-Frank reforms. Restrictions are loosening somewhat, but it is still difficult for millennials to get a loan at a favorable interest rate.
In essence, most millennials still aspire to home ownership. However, the current economic and job situation is making it difficult for them to do so — and coming into young adulthood during the Great Recession and the housing crisis has made them wary of overextending themselves and acquiring too much debt. That level of caution is not necessarily a bad thing, if it leads to proper planning instead of giving up on home ownership dreams entirely.