Why Millennials are Misinformed in the Rent Vs. Buy Debate

introduction

Perception vs. Reality in the Rent vs. Buy Debate

Millennials are presented with Rent. vs. Buy charts all the time, but the factors that are leading them to rent instead of purchasing homes are not what most would believe them to be.

Studies show that Millennials are choosing to hold off on buying because on misguided perceptions of their own financial situation as well as the status of the current housing market.

Studies show that millennials actually want to own homes...

93%

of millennials would prefer to own a home to have control over what they do with their living space.

90%

of millennials would prefer to own a home to have a sense of privacy and security.

81%

of millennials would prefer to own a home to have nicer living conditions.

75%

of millennials would prefer to own a home to feel more engaged in their community.

53%

of millennials would prefer to own a home to have flexibility in future decisions.

But millennials across the board are choosing renting over buying.

Percentage of first time home buyers relative to all homeowners has fallen since the 2008 recession.

32%

First-time homeowners make up 32% of all buyers, compared to a historical average of 40%.

1987

That’s the lowest percentage since 1987!

Why? Because they think they can’t.

In fact, 57% of millennials cite financial reasons for not buying a home. Namely, the issues millennials perceive revolve around Credit, Closing Costs, Monthly Payment cost, and their current Debt-To-Income Ratio.

57%

of millennials cited financial reasons for not buying a home.

Insufficient credit score or history.

credit

Affording the down payment or closing costs.

closing costs

Insufficient income for monthly payments.

monthly payments

Too much existing debt.

debt-to-income

But millennials are actually well-positioned to purchase homes

It turns out that perception is more powerful than reality among reasons millennials cite as stopping them from homeownership.

688

Credit score requirements have actually been easing since 2010. Average FICO score is 688.

credit

42%

According to Fannie Mae, 42% of people ages 18-34 said they don’t know what lenders expect of them.

closing costs

73%

of millennials are unaware of low down payment programs.

closing costs

$2,940

Many millennials think they don’t make enough to own a home, but actually, estimated monthly income for millennials from 25-34 is $2,940.

monthly payments

$945

The median monthly principal and interest payment is $945.

monthly payments

28% - 32%

This fits within the range of 28% to 32% debt to income ratio lenders want to see.

Debt-to-income

Now is the time to buy.

Why? Because millennials make up a historically large segment of our population, and as mentioned above, most are waiting to buy.

66%

Two-thirds of millennials haven’t reached the average home-buying age of 31.

22%

of millennials are under 25 years old.

6 years

Millennials are renting for 6 years before buying, compared with 5 years for renters in 1980.

20 million

Millennials are expected to form 20 million new households by 2025.

What are the implications?

4-5%

Forbes predicts that the national median price will likely rise by 4% to 5%.

$380

Mortgage rates are still at historic lows. Median mortgage payments are $380 less on average than before the housing market collapse.

conclusion

Now is the time for millennials to buy

Many millennials are financially prepared to make the switch to homeownership, despite perceptions that they are not.

With home prices and mortgage rates primed for an increase in the near future, it's a good time for millennials to be buying homes.

Resources

https://www.nytimes.com/2015/06/24/business/economy/more-americans-are-renting-and-paying-more-as-homeownership-falls.html

https://www.realtor.com/news/trends/rent-vs-buy-becoming-homeowner-may-be-more-affordable/

http://www.thinkglink.com/2017/01/13/buying-a-home-vs-renting-in-2017/

https://www.trulia.com/blog/trends/rent-vs-buy-oct-2016/

https://www.forbes.com/sites/trulia/2014/02/28/freshen-up-on-the-7-financial-benefits-of-home-ownership-this-tax-season/#686efc2f5fe8

https://www.houselogic.com/finances-taxes/taxes/homeowner-tax-benefits/

https://www.nerdwallet.com/blog/mortgages/millennials-and-homebuying/

https://elliemae.com/origination-insight-reports/Ellie_Mae_OIR_DECEMBER2015.pdf#page=7

http://www.fanniemae.com/resources/file/research/housingsurvey/pdf/consumer-study-121015.pdf#page=14

http://economistsoutlook.blogs.realtor.org/2015/04/08/66-percent-of-first-time-home-buyers-make-a-low-down-payment/

https://www.forbes.com/sites/lawrenceyun/2017/03/02/housing-demand-over-the-next-decade/#73a89449f662

http://www.kiplinger.com/article/business/T019-C000-S010-interest-rate-forecast.html

https://www.usnews.com/news/business/articles/2017-08-24/average-us-mortgage-rates-flat-to-lower-30-year-at-2017-low

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