I recently ran across an interesting article about some of the challenges millennials face when it comes to buying their first homes; one of the biggest challenges is their own misconceptions about what it takes.
Millennials were born in the 1980s and early ‘90s, so they are mostly in their 30s now. One of the undeniable difficulties they face is saving for a down payment. According to a study of more than 1,000 millennials by Lombardo Homes (lombardohomes.com), 83 percent of millennials are actively saving for a home right now, but 71 percent say it is difficult to make much headway because their rents and other expenses are so high. After paying monthly expenses like food, rent, and utilities, the rest of their paycheck goes toward paying down credit card debt, student loans, and car payments.
But lack of a down payment is not the only reason millennials are reluctant to buy a house. Many millennials see other investments such as the stock market or cryptocurrency as a better use of their hard-earned dollars. Still others are scared by the commitment of homeownership. They don’t want to be tied to one place. They worry about job security. They don’t want to deal with upkeep and maintenance, and if they’re buying with a significant other, they worry the relationship won’t last. Here’s a rundown of the reasons millennials aren’t buying homes.
- 85% Cannot afford it
- 67% Cannot afford something nice enough to compel me to buy
- 63% Want to be flexible, not tied to one area
- 62% Not ready for the commitment
- 56% Job insecurity
- 53% Concerned about housing market crash
- 49% Don’t want to deal with upkeep and maintenance
- 39% Don’t want to furnish or decorate a full home
Sometimes these reasons are legitimate. Other times they are based on inaccurate assumptions. The Lombardo survey suggests that one in four millennials underestimates their buying potential by at least $150,000. On the survey, millennials underestimated their buying power by an average of $78,000. Also, 62 percent underestimated the increase in real estate’s value over time. So, if you thought you couldn’t afford a home or believed the investment wouldn’t have a very good return, you’d probably forego the experience.
Millennials also didn’t know much about property ownership in general. When asked if they could confidently define terms like deed, assessment, principal, escrow, and amortization, most said no. When asked how much interest they would pay over the life of a 30-year fixed mortgage, a third of them underestimated the amount by more than 90 percent. More than half didn’t have a sense of average home prices in their area and almost 80 percent didn’t know if property taxes in their area were high or low.
Here’s my advice to millennials. If you plan to remain in the area for more than a few years and you can afford to buy a house, it’s likely a good investment. Rather than trying to buy your forever home, look for a solid starter home, one for which you can afford not only the purchase, but the upkeep. I estimate about 3 percent of the purchase price per year in additional expenses, so on a $450,000 home, plan to spend another $13,500 per year on things like property taxes, homeowners insurance, fixing a leak, painting the interior, patching the roof, or getting a new water heater. It’s not a matter of if you’ll need to pay for repairs, but rather when.
While this may all sound expensive, over time, real estate has proven to be one of the best investments around. As a rule, it outperforms the stock market. If the last 50 years are any indication, buying a home will allow you to more than double your money in ten years.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 45 years.