Exploring Millennial Home Buying Hesitancy

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Has Home Buying Become American Dream Deferred?

Young renters in the much of the nation’s metro areas can afford to own a home. This includes the ability to afford all financial responsibilities associated with homeownership including homeowners insurance and property taxes. While there are many reasons why young renters are not converting over to homeownership, high student loan debt and the comforts of living at home with mom and dad may not fully explain the millennial hesitation with buying.

The Harvard Joint Center for Housing Studies (HJCHS) just published an interactive map which shows that more than 50 percent of renters could afford to own a home in many U.S. metro areas. To create the map, data was used from different sources to calculate renter incomes and homeownership costs in 85 of the 100 largest metro areas. One of the parameters taken into consideration is non-housing related debt. Student loan debt is the highest type of debt except mortgage debt in the U.S. at $1.2 trillion. HJCHS researchers used a conservative debt-to-income ratio of 8 percent to account for young renters’ debt. This data was pulled from the Federal Reserve’s Survey of Consumer Finances. According to the survey, the average amount of car and student loan payments and credit card bills is about $340 per month. The methodology for arriving at the study’s conclusion is here.

For example, in the Chicago metro area, there’s a homeownership rate of about 65 percent and a little over 38 percent of Millennials are homeowners. About 47 percent of Millennials could afford to own given the median monthly costs and home value of $1,300 and $189,200 respectively.

One of the assumptions required by the analysis is the 43 percent debt-to-income affordability ratio; a requirement of the Qualified Mortgage rule which went into effect in January this year. The other assumption is that of interest rates on a 30-year mortgage and 5 percent down payment.

So why are more Millennials not rushing in to buy homes in the more affordable metro areas? Are they choosing to sidestep the American dream or are there other factors such as the fear of not qualifying or tighter credit that may be influencing this hesitancy?

Based on a Brookings Institution report on the causes and effects of student loan debt, young renters may be squeezed out of a still too tight credit market. The difference in credit scores between student loan borrowers and those without student loan debt is significant. Another growing factor may be the competition from investment companies buying large amounts of more affordable homes and converting them to Single-Family Rental.

All-cash purchases also figure into the Millennials’ hesitancy. Almost 43 percent of all home sales in the first quarter of 2014 were all-cash purchases. This is double what all-cash buys were to the market during the same period a year ago. Even when the young renter has the income to purchase a home in their market, their credit can’t compete with investor cash. More than half of all home purchases were all-cash deals in a variety of markets, including Detroit, Atlanta, New York, Las Vegas and Memphis, according to the Q1 RealtyTrac report.

It may be a while before Millennials reach for homeownership in much larger numbers. The Great Recession set potential homebuyers among this group back years, while the financial system reforming Dodd-Frank Act has made it more difficult for the newly employed to get access to credit. This makes it that much harder to leave the comforts of a parent’s home or to not want to rent.


City Lab, from The Atlantic. “Many Renters Could Afford Mortgages, But Can’t Afford Homes” 7 August 2014. http://www.citylab.com/housing/2014/08/many-renters-could-afford-mortgages-but-cant-afford-homes/375599/

Time.com. “10 Things Millennials Won’t Spend Money On” 7 August 2014. http://time.com/money/2820241/10-things-millennials-wont-shell-out-for/

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