Millennials, you are simply not ready to buy a home. Or so the story goes.
The recent rhetoric is all the same: Millennials just aren’t cutting it financially. They aren’t saving enough to buy a home -- and yet they think they're entitled to.
A new Trulia survey, previewed by Yahoo Homes, frowningly found that more than half of prospective home buyers who are Millennials plan to ask the "bank of Mom and Dad," to use Trulia's phrase, for down payment money.
But in defense of my Millennial generation, I'd point out that that's money toward a down payment—not necessarily the whole thing. Plus, lots of our parents asked their parents for help on their first down payment too.
And more than a third of Millennials--37 percent--are actually willing to work a second job in order to save up, Trulia found.
The Trulia study also found that 65 percent of Millennials are not willing to give up their car to buy a house. As a Millennial, I don't find that shocking. Only about 25 percent of American cities are considered truly walkable, according to Walkscore.com, and public transportation is often sorely lacking. How else would they get to work?
Forty-five percent won’t give up their smartphone and 20 percent won’t give up cable—both of which I admit are arguably unnecessary—and roughly 15 percent won’t give up Netflix.
Somehow I don’t think it’s our Netflix subscriptions that are holding us Millennials back from the housing market.
According to the Project on Student Debt, kids these days (people younger than 30) have student debt nearing $30,000.
That’s your down payment right there.
Does less than 20% down really mean you're not ready?
So say you’re this average Millennial and you’ve got $30,000 in loans, on which you pay $500 a month at 5 percent interest. It’ll take about five years to pay your loans off. With incomes for graduating college students at $45,000 a year—and honestly, I think that number is a bit generous, National Association of Colleges and Employers--that’s nearly a quarter of your take-home pay.
That’s not to say you’re necessarily struggling, but you’re starting to look at your early 30s as the first available opportunity to buy a home.
And then there's that 20 percent down marker that so many housing experts hold paramount:
“When buying a home today, it's critical to be conservative and to safeguard your purchase,” advises Trulia real estate expert Michael Corbett in the news release. “Forget the 'no money down,' or the 5 and 10 percent down payment purchases. Many banks will be hesitant to give you a mortgage otherwise, and a 20 percent down payment gives you some equity right from the start and usually gets you a lower interest rate. Best rule of thumb: If you can't scrape together the 20 percent, then you probably can't really afford to buy just yet.”
That’s all well and good, but homeownership still holds a solid piece of the Millennial heart. We want to own just as much as our parents did.
And while you can frame this in a Veruca Salt “give-it-to-me-now” kind of way, the truth is, now is a great time to become a homeowner, regardless of your generation. Interest rates are still at the lowest lows they’ve been in 50 years, and home prices are only going to get more expensive the longer you wait.
So if I don’t have 20 percent, but I’ve got something and I’ve got a solid income from a steady job, are the experts really saying I shouldn’t buy a home?
'You cannot buy a home you can't afford'
I called up Corbett to clarify.
“I’m a huge proponent of homeownership,” Corbett said. “If you meet the right criteria, buying a home is always the best long-term investment you can make.”
It’s that "right criteria" portion that he wanted me and my fellow Millennials to pay attention to. And truthfully, Trulia’s survey bears out his attitude: Nearly half of Millennials don’t know how they're supposed to have 20 percent for a down payment, and among those who do, nearly 2 in 5 would put down less than 10 percent.
In other words, many of them don’t even know what they can afford, and therefore don't really know if they’re ready to buy. They may think putting down less than 10 percent sounds good—I did at first--but aren’t aware of the risks, and extra long-term costs with low down payments.
After all, it was the very people who were practicing risky purchasing behaviors -- such as putting down very little on homes they couldn’t afford through convoluted financing -- who lost their homes in the crisis, Corbett says.
Regardless of whether or not it’s a good time to buy a house, “you cannot buy a home you can’t afford,” he says.
As a Millennial home buyer, I played around with numbers myself before heading down the home purchasing path, but it wasn’t until sitting down with my mortgage guy that I really understood my situation.
“When you’re really ready to buy, it’s time for a reality check,” Corbett said. “There are two things that are going to be quite shocking to you no matter how smart you are. One will be how little you get for your money when purchasing your home, and two will be how much you can actually afford.”
I think that’s the real point here.
I don’t think your willingness to ask your parents for help means you’re not ready (especially if they actually want to help you). I also don’t think your inability to save 20 percent means you’re not ready.
But if you don’t know your situation, and haven’t actually talked to a real human being about what you can afford, then you’re not ready.
If you want to figure out if you’re ready for homeownership, here’s some questions Corbett suggests you answer.
1. Do you know the actual costs of homeownership?
Beside your mortgage payments, you’ve got taxes, homeowners insurance, maybe hazard insurance, maybe homeowner’s association dues and if you’re not putting down 20 percent, you’ll have mortgage insurance tacked on.
Add into that the cost of maintenance—that little cushion fund you should have for when the air conditioner breaks or the plumbing leaks.
2. Do you know what you can really afford?
A loan officer is not a financial advisor, so what your numbers qualify you for isn’t necessarily what you can afford. Corbett’s rule of thumb is to purchase a home for 20 percent less than what the bank qualifies you to buy. So if they qualify you for a $250,000 home, buy a $200,000 one. Better yet, work backward. Tell the bank what you can spend each month (don't forget the nonmortgage costs of ownership!) and have your mortgage guy tell you what size loan you can get.
3. How long will you be in the home?
“I always say, especially for Millennials, can you live in this home for five to seven years?” Corbett says. “If you can’t, it may not be the time to buy.”
It usually takes about five years just to recoup the costs of buying your home, assuming historical appreciation rates. So without the exploding home prices we saw during the bubble years, you really won’t be break even until you’ve been there at least that long.