The GI Bill of 1944 spurred the mass exodus of residents from city life to homeownership in sprawling suburbia that exists as the norm today. Post-WWII era in America saw an unprecedented surge of homeownership that has persisted into the 21st century. But in the two most recent U.S. Censuses, it was reported that only 37% of millennials aged 25-34 own their home – markedly lower than Gen Xers and Baby Boomers, of whom 45% owned their homes during this same age span.
One of the most obvious reasons that homeownership is down is the fact that student debt has skyrocketed. The average cost of one year’s tuition in 1977 (adjusted for inflation) was just $2,607! In 2019, the average cost of tuition was $10,230 – this is a 400% increase! Take a look at the chart below, detailing the cost of living from 1975 to 2015, adjusted to inflation.
Source: David Stockman (http://www.mybudget360.com/cost-of-living-compare-1975-2015-inflation-price-changes-history/)
Another large factor impacting homeownership is a respectively delayed marriage rate. The marriage rate among young adults dropped from 52% in 1990 to 39% in 2015. Data demonstrates an 18% increase in homeownership after marriage and this makes sense, given that two incomes are better than one. Millennials are also choosing to wait longer than any previous generation before having children, with some electing not to have children at all. Couples who don’t have children are not in the same hurry to delve into homeownership as young parents.
In addition, there is a preference amongst many millennials to live in high-cost city centers before and even after they get married and start families. Due to a rise in luxury apartment complexes, urban amenities, and public transportation options like Uber and Lyft, living in metropolitan centers is the lifestyle-du-jour of today’s twenty-somethings. Apparently there is a breaking point though; a recent Realtor.com survey found that 23% of millennial homebuyers were enticed to buy because rent was becoming too expensive in their cities.
According to a recent article published in Forbes,
“[due to] an inventory constraint issue in the hottest markets, it has become increasingly difficult to buy a home in cities like Nashville, Austin, and Raleigh. Job growth has outstripped housing, leading to sparse housing supply below the $300k price point.
The article goes on to state that that problem is not that millennials don’t have the income and job security to buy homes, but rather that in some markets, there are not enough suitable homes to buy.
There are many reasons millennials are holding off on homeownership; lack of available homes, student debt, delayed marriage, and preference for the urban lifestyle. But if you are a millennial trying to achieve homeownership, how do you manage to save while renting? With student debt and rent higher than ever before, is it even possible to sack away enough money for a down payment without moving back in with your parents? Here are some helpful tips and tricks for saving:
Paying Down Your Debt
Getting approved for a mortgage has a lot to do with your outstanding debt. In order to be approved your debt-to-income ratio has to be favorable and your credit score has to be good. Consider getting rid of all revolving credit (credit cards) and paying down installment loans (student loans and car loans). Check out our article about what affects your credit and how to improve it. If you want to be approved for a 30-year mortgage, you should adhere to the 28/36 rule; your household should spend no more than 28% of its gross monthly income on total housing expenses, and no more than 36% on all debt. . For example, to obtain a $300,000 mortgage loan, your salary would need to be anywhere from $77k-$106k depending on your debt.
High-Interest Savings Account
The average interest rate on savings accounts nationwide is 0.09%, whereas high-yield savings account interest rates are often between 1.6 – 1.9%. A high-yield savings account grows your money faster. For example, if you have $1,000 in savings, a high-yield savings account with an interest rate of 1.9% would earn you $19.17 in interest after a year, whereas a regular bank would only earn you a measly 90 cents. While many of these high-interest savings accounts don’t exist at brick-and-mortar banks, there are a number of online banks that offer great annual percent yields.
Reduce Unnecessary Purchases
We all grow accustomed to certain lifestyles as we begin to make more money. An old saying comes to mind, the more you make the more you spend. For many of us, as our salaries increase, so does our lifestyle. Consider whether or not you could go back to living like a college student? Mooching off of someone else’s Netflix account? Eating leftovers for lunch? Ordering the house wine? It could mean a difference of thousands over the course of a year. Really re-evaluate your need for these common ‘necessities.’
- Full-Access Gym Membership
- App Subscriptions on your phone
- Expensive To-Go Coffee
- Unlimited Data
- Video Streaming Services
- Music Streaming Services
Save Your Tax Refund
Instead of earmarking this lump-sum for some large expense, consider throwing it right into that high-interest savings account instead. It’s not money that you normally have in your budget, so if you don’t rely on it, you’ll never miss it!
Automate Your Savings
For most of us, we don’t miss money that we don’t even see. You can set up a direct transfer with your bank so that a certain amount of money from your paycheck goes directly into a savings account that you don’t readily see or use. That way, you don’t have to remember to manually make a transfer every other week – out of sight, out of mind. Consider looking into budgeting apps that can help you automate your savings like mint or pocketguard.
Get a roommate / Evaluate your apartment
If you don’t already have one, getting a roommate can reduce your rent by (on average) one-third! If you live in an apartment where this is not possible, you could even consider moving and subletting your current apartment. Depending on how much you sublet your apartment for, you could even end up making some money!
Many have asked themselves, is it worth it to buy a home in this day and age? Some experts actually say no. Due to the relatively steady rates of inflation in the U.S. and high cost of home updates and repairs, some economists are saying that buying a home is no longer a lucrative-enough investment. Robert Shiller, winner of the 2013 Nobel Prize in economics (known for accurately predicting the housing bubble of 2008) says in an interview with the Washington Post,
“People forget that housing deteriorates over time. It goes out of style. There are new innovations that people want, different layouts of rooms. And technological progress keeps bringing the cost of construction down.”
This last point that he makes is a good one – homes go in and out of style and still have to compete with new ones that are comparably cheap. Many experts speculate that homeownership is less of a financial decision and more of an emotional one, since many Americans see homeownership as their badge of belonging to the middle class, success, and adulthood. But when housing prices only grow at a compound annual rate of just 0.3%, is this an emotional investment worth making? Only you can decide for yourself.