I spend more time than I would like to admit looking at real estate listings online. I recently found a nice townhouse in my neighborhood that costs 25 times my annual salary, which is honestly a better deal than most other places in the surrounding area. The moral of the story is that I’m convinced I’ll never be able to afford a home, at least not anywhere I’d like to live.
According to a new study by Bank of America, I’m not alone in my pessimism. Its annual homebuyer insights report, released on Wednesday, found that 72 percent of millennials, which the report identified as being born between 1978 and 1995, consider being able to own a home a “top priority” — more than traveling (61 percent), getting married (50 percent), or having children (40 percent). Millennials may be killing the housing market, but it’s not because they don’t want homes of their own.
Even if millennials are putting off having kids (which are expensive to raise) and weddings (which are expensive to have) to buy a home, a host of structural factors are getting in their way. High rent prices, student loan debt, and the toll of the 2008 financial crisis are all keeping young people from buying property. Some of these hurdles are purely psychological — naturally, a generation that grew up in the midst of foreclosures and evictions would be scared of buying property — but most are material. Young people spend a lot of money on student loans and rent payments, which keeps them from having money for, well, anything else.
Millennials spend too much money on rent
Generally speaking, young people prefer to live in cities, where both rents and property values are higher, according to a July study by the Urban Institute. The Bank of America report, which polled 2,000 adults who own a home or plan to in the future, also found that 90 percent of first-time buyers would rather find a place in their preferred location, which also drives up prices.
Nearly half the people polled by Bank of America said they spend more than 30 percent of their income on rent, meaning they can be described as being “rent-burdened.” Rent-burdened households have higher eviction rates and are more financially precarious than homeowners or renters who spend a smaller proportion of their income on rent, according to Pew.
It’s not uncommon for people to be rent-burdened in cities like New York or San Francisco, where rent prices outpace wages. This means they have less money left over that can be used for a down payment — and 53 percent of those polled said they’re waiting to buy until they have enough money saved up.
The massive burden of student loan debt
Ten percent of the 2,000 people polled by Bank of America say they have put off buying a home because of their student loan debt. This seems like a relatively small number, but other studies have suggested that student loan debt — especially when coupled with stagnating wages and rising property values — can be an insurmountable burden for young people who want to buy homes.
The average student loan debt in the US is $32,731, according to the Federal Reserve — and the collective student debt carried by all Americans hovers around $1.5 trillion. These high debt levels prevent millennials from purchasing homes, even if they really want to. A 2017 study by the National Association of Realtors (NAR) and American Student Assistance found that student debt delays millennial homeownership for seven years.
According to Lawrence Yun, a chief economist with the NAR, student loan payments prevent people from saving for a down payment or being able to afford a mortgage. “Sales to first-time buyers have been underwhelming for several years now,” he said in a 2017 statement. “Even a large majority of older millennials and those with higher incomes say they’re being forced to delay homeownership because they can’t save for a down payment and don’t feel financially secure enough to buy.”
That said, there’s no real way to win here. A June 2018 study by ApartmentList found that indebted graduates take four years longer to put down a first home payment than those who have no college debt — but those who didn’t finish college take even longer.
Kathy Cummings, the senior vice president of Bank of America’s Homeownership Solutions and Affordable Housing Programs, told me that college grads are generally better off than those without a degree. “Even though you take on the student loan debt, the earnings potential that you have is higher than if you just have a high school diploma,” she said. “The key is really completing that degree.”
The looming threat of another recession
Even if the economy has largely recovered from the 2008 financial crisis, young people haven’t. Materially speaking, the Great Recession widened the wealth gap between millennials and preceding generations, according to a May study by the Federal Reserve Bank of St. Louis. Millennials carry student loan debt, but also car and credit card debts that prevent them from taking on a mortgage — which is a “good” kind of debt that has the potential of appreciating in value.
And psychologically speaking, millennials are still feeling the effects of the Great Recession. One Morgan Stanley analyst told Business Insider that the financial crisis left an entire generation with a “significant psychological scar.” They’re scared of losing their jobs. They’re terrified of the stock market. And this feeling of financial precarity, coupled with a less than ideal financial reality, is keeping young people from buying houses.
“That fear is healthy,” Cummings told me. “That really gets you to the point where you’re making sure that you understand things before you move forward.”
She added that young people often believe “persistent myths” about buying homes, like thinking that they need a 20 percent down payment to have a home.
“There’s a lot of misinformation out on websites that encourage people to put down 20 percent,” she said. “Financially, it is a good practice, but it’s typically not necessary — especially in markets where there are increasing home prices, and there are currently affordable homes, it’s something to consider.”
“If you don’t have 20 percent down, there is absolutely an opportunity to pursue a mortgage,” she added. She also noted that some providers have 3 percent down payment requirements, some people may qualify for down payment assistance programs, and you don’t “need to have a perfect credit score” in order to qualify for a mortgage.
For recession-scarred millennials, though, the idea of buying a house with less-than-perfect credit or a small down payment may not sound like the smartest financial decision. After all, the people who took out subprime mortgages in the years leading up to the 2008 financial crisis were evicted from their homes; the banks that approved those mortgages were ultimately fine. And for those who can’t scrape together enough money for a down payment of any kind — or who are too scared of another financial crisis to take out a mortgage when they don’t have enough money saved up or have a lower credit score — putting off other major milestones is seemingly the answer.
Millennials aren’t intentionally killing homeownership, or marriage, or having kids; they just don’t feel like they can afford it.