A Bethesda client of mine, a baby boomer with millennial children, wanted my thoughts on the following Washington Post article:
The article does a good job of discussing why the rate of homeownership among millennials is down versus previous generations. While it’s true that, as a percentage, millennial home ownership rates are lower than previous generations, here are my thoughts on how this generation will affect housing in the future.
Millennials are the single largest generation (larger than the baby boomers) and the majority have not purchased a home yet. Virtually every poll indicates that 93% of them aspire to purchase a home. In our metro DC area, it’s quite uncommon to purchase a home before turning 25 years old and the vast the majority of millennials are still under 25. In fact, the oldest millennials are now 35. This group graduated college during the Great Recession. As a consequence, their home buying cycle was stalled.
Here is what I predict. The oldest millennials, who were originally sidelined from the home buying process due the recession, will now begin entering the market in droves. The greatest number of millennials, now ages 24 to 25, are still too young to make the commitment to a home/mortgage. However, they are only 2 to 4 years away from hitting that point. Combine the delayed purchase demand of the older millennials with the up-and-coming purchase demand of the 24 to 25-year-old millennials and I think we are going to have tremendous upward demands on housing. Keep in mind that millennials are more interested in walkable communities than big suburban houses. At the same time, many of the baby boomers are becoming more and more interested in selling their larger suburban houses for smaller urban locations.
I predict the demand for urban areas is only going to soar as a result of the largest generation, Millennials, and the second largest generation, Baby Boomers, all chasing housing units in the same urban locations. We are already seeing the early impact of this on prices in the walkable locations. The rising prices in high demand, walkable areas are affecting both baby boomers and millennials in different ways.
Baby boomers looking to downsize may be disappointed to find their suburban homes values are not keeping up with the surging prices in the urban locations. Many boomers experience sticker shock when they consider the price per square foot of what they are selling compared to the price of what they want to buy. Any boomer wanting to make this lifestyle change would be well-served to meet with a knowledgeable Realtor who can clearly articulate how demographic changes are impacting home-pricing trends. Understanding this prior to making a move will make the entire transition much easier. There is plenty of documentation that shows that the longer you wait the less purchasing power you will have.
When boomers make this lifestyle change, they have one huge advantage over millennials. That is cash reserves. Boomers typically own a house that has appreciated nicely for years. Upon selling it, they can either make a large down payment or all-cash payment for their next purchase. For the boomer, the hardest decision is the tradeoff between walkability and amount of space they’ve become accustomed to. My advice, if you are thinking of selling in a suburban location and buying in an urban one, is to try to do it well ahead of the unprecedented demand for urban living that I expect to see over the next several years.
Millennials not living with their parents are probably already living in a walkable location. As this group follows the sales trends online, visits open houses, and watches their friends buy, they quickly become attuned to how fast prices are rising. These potential buyers almost always need a large mortgage to make a purchase, so any indication of interest rate increases is also a cause for anxiety. The one-two punch of rising prices combined potential interest rate hikes fuels fear in this generation of being priced out of the market.
When asked, many millennials have no idea how much money is needed for a down payment. They just assume it’s more than they have. The reality is that, with good credit, they can buy with as little down as either 3% or 5%. Most renters are also aware of the tax benefits of buying but have trouble figuring out what the impact will be for them. Here is a general rule-of-thumb. Take the rent you currently pay and divide it by 77%. The resulting number is the approximate monthly mortgage payment you can make that will leave you with the same after-tax dollars as your lower rental payment.
Lots of excitement surrounds a first-home purchase, however, getting a handle on the most ideal home to buy can be a bit tricky. Is a one-bedroom condo in a great location being too short-sighted? If having kids is in the foreseeable future, how much space will you really need? Is the reality that giving up walkability for a larger house in the ‘burbs going to be the best choice for your future family?
Just remember that the purpose of buying a home is to make life better. My advice for millennials is to never rush a buying decision. A mortgage is a commitment that can keep you tied down geographically (unless you are willing become a landlord). Carefully think through what your life might be like five years from now. Will you need to make tradeoffs in location for more space?
Once you’ve weighed your options, if it does make sense to buy, your timing could be perfect. I strongly believe that those who purchase while interest rates are low and ahead of the expected price gains will have provided themselves with a huge future financial advantage over their contemporaries in two ways. First, their monthly payments will be lower. Second, they will have had the benefit of accumulated appreciation that comes with purchasing ahead of the