Young adults need to save for at least 5 years to buy a home: study

Young adults need to save for at least 5 years to buy a home: study

We know buying a home isn’t a realistic possibility for most Americans. Particularly among homebuyers 35 and younger, affordability is a central concern, with 32.5% citing it as their primary worry. Only 7% said they had no concerns about the process, according to a recent study by real estate site Redfin.

MagnifyMoney, a site that helps consumers compare financial products, released an extensive report that analyzes and compares home affordability in 380 metro regions across the US.

Key findings

No big surprise here: MagnifyMoney found that of 380 metro areas, there was not a single place in America where an individual of any age group could realistically save up for a new home in under a year.

The site broke down results into three distinct age groups. Across all 380 metro areas:

  • 45- to 65-year-olds would need an average of 4.69 years to save for a home
  • 25- to 44-year-olds would need an average of 5.63 years to save for a home
  • 15- to 24-year-olds would need an average of 27.2 years to save for a home.

It would take at least three years for 25- to 44-year-olds to save for a home in a quarter of all metro areas analyzed. (Amount of money needed includes upfront costs of homeownership, like down payment, closing costs, and a one month cash reserve, equal to one month mortgage payment. More on the report’s methodology below.)

The most affordable metro area for young adults

Naturally, the most affordable places will have the narrowest gap between median annual income and median home price. According to Magnify, Johnstown, Pa., is the easiest place for those 25 to 44 to save for a home, primarily because affordable housing is abundant — a median-priced home in Johnstown is $74,900 (the median home price of new homes sold in the US is $296,400). If someone saves enough to cover a 20% down payment, closing costs and a one-month mortgage payment reserve, it would take just 1.85 years of saving to afford a home in Johnstown.

The least affordable metro area for young adults

Salinas, Calif., is the most out-of-reach metro for 25- to 44-year-olds dreaming of homeownership. Earning the median annual salary of $54,499 and looking at a median-priced home listed at $750,000, young adults would need a whopping 46.75 years to save up enough. California as a state is where “homeownership dreams go to die,” according to the report. Nine out of the 10 most expensive metro areas for homebuyers between 25 and 44 are in California.

Meanwhile in the Midwest…

On the flip side, nine out of the 10 most affordable metro areas for 25- to 44-year-olds are in the Midwest, where overall housing prices are significantly lower than the rest of the US. It would take just 2.28 years for people in this age group to save for a home in these metros.

The study also looked at the 15- to 24-year-old age group. They acknowledge that 15-year-olds aren’t looking to buy a single-family home and are still considered children. MagnifyMoney chose to start at 15-year-olds because the Census Bureau data starts at that age range. The study found it would take 15- to 24-year-olds more than 10 years to save for a home in 75% of all metro areas.

Study methodology

MagnifyMoney identified two sets of buyers: those who can afford the cost of a new home in their area and those who can’t. It used two different methods to determine how long it would take for each group to save for a home. Affordability was largely driven by a worker’s ability to qualify for a mortgage big enough to cover the cost a median-priced home in their metro area.

Magnify assumed that the borrower can spare 35% of monthly income for mortgage-related payments. Based on this amount and the current interest rate for a 30-year fixed-rate mortgage (3.625%), the Magnify team calculated the total mortgage that the borrower can afford to take. They then took the mortgage amount they would qualify for and subtracted it from the cost of a median-priced home in their area to find the mortgage gap they need to fill and added other upfront expenses like closing costs and a standard emergency cash reserve equivalent to one month’s mortgage. Then, based on the median income for their age, Magnify determined how long it would take for an individual to save that amount (assuming a 20% savings rate).

~ Don’t let this discourage you. There are lot’s of options out there to help with your down payment. Contact me or your trusted lender to discuss these with you ~

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