There is an oft-repeated fiction of debt-doomed millennials perpetually dwelling in parental basements, or bunking up with a dozen friends in a half-dozen rooms. These images emerge from a disheartening fact: Today’s 25-34 year olds have a homeownership rate 8% below what Baby Boomers and Gen Xers achieved at an equivalent age.
Though student debt still dogs many Gen Yers, rebounding employment rates and suburban revival have finally provided young people a path toward homeownership. In fact, in a Quartz Creative Twitter poll that drew almost 7,000 respondents, 55% of young people who finally have control over student debt listed “buying a home” as a subsequent financial priority. Today’s median first-home buyer is, in fact, 32 years old. This is encouraging, but in our post-crisis era, many millennials remain wary of our home lending processes, doubtful of affordability, and nervous about market volatility.
This is understandable, but is an overcorrection and an assumption worth revising. There’s still a segment of 30-something urbanites who can afford a down payment and would gain financially from home investment, which largely remains critical for wealth-building.
Below, we break down prevailing mythologies about home buying in 2018.
A house is a big financial commitment. There’s a down payment, mortgage payments, and less obvious costs: insurance, upkeep, realtor and HOA fees.
These costs are currently exacerbated by a shortage of starter houses in major metropolitan areas, where employment for young people is increasingly concentrated. In 2016, starter houses comprised only 22% of new single-family homes, compared with 33% on average from 1999 to 2007, according to Harvard University’s Joint Center for Housing Studies.
And yet, even as urbanization foreseeably continues, home buying isn’t out of reach for young people. Even in cities like New York, DC, and Boston, median housing expenses (mortgage and other costs) account for less than 30% of median incomes. Today’s interest rates are historically low: about 4.7%, versus 8% in 2000 and over 16% in 1981-82, when affordability was unprecedentedly bad.
The bigger affordability challenge is upfront costs—particularly down payments. Contrary to stereotypes, millennials mostly bootstrap their own down payments, with 58% having saved and 24% getting money from the sale of a previous home. Only 21% got a down payment as a gift from family or friends. Saving for a down payment isn’t easy, but it’s far from impossible with sound financial planning and smart concessions on location and home size. In fact, millennials show all signs of following previous generations’ home buying path, just a little bit delayed.
Millennials came of age in a rare moment of history. The housing market bubble grew and burst. In December 2008, the Case-Shiller Home Price Index reported its largest price drop in its history. The crash was a reality check for lenders, and a deterrent for young people who lost faith in home investment. But in just a few short years, home values have largely climbed back up. Even during volatile aberrations, home values remain smart long-term investments.
A house is a special asset—it can’t move, you can’t break it up to sell a small piece, and its value depends not only on how well you take care of it but also on the prosperity of the greater community. Such characteristics can influence prices, especially when a seller is in a hurry. Usually, though, sellers are loath to lower the price, even in the face of weak demand. This makes prices “sticky” because sellers would rather stay put—if they have the choice—and wait for prices to bounce back.
“A decade ago, we experienced a huge run-up and collapse in prices, and since then people have the impression of house prices being volatile,” said Jung Choi, research associate at the Housing Finance Policy Center at the Urban Institute. “In fact, they’re very sticky.”
Consciously or not, people purchase a home to protect themselves against future increases in house prices and rents. If you’re a renter, your rent can go up, sometimes a lot, from year to year. If you are thinking about buying, you can face higher home prices. But if you are a homeowner with a fixed mortgage rate, you are guaranteed to pay a set amount every month, for as long as 30 years. That is stability, not volatility. Even better, eventually you pay off your house and get to live rent-free (and mortgage-free).
Equities have slightly outperformed home ROI since 1980, but going back further, housing consistently averages higher returns. But even so, buying a house isn’t comparable renting and investing in a stock portfolio. “Buying a house forces you to save,” Choi said. After 30 years of paying off a mortgage you end up with a house, compared with nothing at all from renting. A paid-up home is a boon in retirement—you don’t have to worry about being priced out of where you live.
People who relocate often may be better off renting. A house purchase involves one-off expenses, such as closing costs and paying a realtor. Some calculators can help you determine how long you should stay put before buying outsaves renting. Below, we’ve listed the number of years it takes for buying a home to be cheaper than renting based on Zillow’s analysis of 26 city medians.
The takeaway is this: If you’re planning on staying in one location for more than just a few years, buying can be a wise option. It’s no coincidence that marriage and having children are the top factors that motivate people to buy homes—starting families often requires long-term commitment to a location. Although millennials have delayed these life milestones, they are now jumping in, looking for three-bedroom/two-bath homes near good schools in suburbs and emerging cities.
How much can you comfortably afford to spend on a home? Try First Republic’s calculator and find out.
This article was produced on behalf of First Republic Bank by Quartz Creative and not by Quartz editorial staff.
First Republic Bank, Member FDIC and Equal Housing Lender.