The first part of this series highlighted the lack of participation in the housing market by Generation Y, and explored the barriers young Americans face when it comes to homeownership. You can view the first post in this series here
Americans aged 18-32, commonly referred to as Millennials, are renting rather than buying, even when they are financially able to pursue a mortgage. After coming of age during the housing crisis, relying on student loans to pay for higher education, and struggling to find jobs after graduation, Millennials are understandably hesitant to make the large financial commitment required to buy a home. Yet the current real estate market is very favorable to Millennial buyers, and an investment made now may pay off significantly in the future.
Interest rates are at a 16 month low
Despite fluctuating market forces, the average interest rate on a 30-year fixed-rate mortgage is under 4.5 percent, often dipping closer to 4 percent. Millennials may not remember a time where interest rates climbed to just above 10 percent, which could partially explain their reluctance to take advantage of these lower rates. Young homebuyers have a much easier time purchasing when interest rates are low, as they tend to have less access to capital and are just beginning their careers.
Down payment amounts are flexible
Though lenders are more stringent with mortgage applications than they were pre-crash, it’s possible to purchase a home without a 20 percent down payment. Many programs exist to assist first-time buyers, both at the state and federal level. One option is the Federal Housing Administration’s loan program, which offers mortgage loans that require down payments as low as 3.5 percent. Home buyers who receive assistance from the FHA loan program are provided with first time home buyer education, which can alleviate some of the stress and uncertainty young people may feel when shopping for a home. Millennials who haven’t considered purchasing property may be unaware of the educational and financial assistance that is available.
Rising rents make ownership more attractive
In metro areas, markets are hot and supply limited. Due to limited supply of units, the rapid rise in renters post-recession, and a national shift toward living in urban areas, rents have gone up by 2.6 percent according to the national average. Finding affordable housing in the nation’s largest metro areas is difficult for young people regardless of salary size and debt burden.
Markets like New York, D.C. and San Francisco are so competitive that rental rates rise every year and it’s almost impossible to find a rent controlled unit. When rents are rising with no end in sight, obtaining a fixed-rate mortgage when interest rates are low can keep monthly housing costs predictable and secure.
Starting young makes investments more resilient
For all the challenges that come with being young during a turbulent time, Millennials have one edge that is only available right now. The earlier they begin to invest their money, the more time they have to watch their wealth grow. Investing earlier protects against the short-term volatility of markets, and gives people the ability to reinvest any earnings well before retirement. Purchasing a first home in a buyer’s market is a way for Millennials to make up for any loss of earning power early in their careers.