The Entry Level & Affordable Options are NOT There
Millennials, for the most part, are a generation of renters. Only 34.7% of Americans under the age of 35 owned their homes as of 2016, according to a Census Bureau survey. But that’s not always by choice. According to a Pew survey, 72% of renters hope to become homeowners one day. One big hurdle, especially for Millennials, is that they are unable to buy affordable homes. Millennials are not often in a position to afford more than an Entry Level home. Townhomes are sometimes more affordable and offer a solution that Millennials are turning to.
Millennials are buying Townhomes because they are Affordable. Being Affordable is the key to selling homes to Millennials. It’s a question of logistics. They are just not able to afford anything more.
When determining what home price someone can afford, a guideline that’s useful to follow is the 36% rule. This is calculated by taking the total monthly debt payments (student loans, credit card, car note and more), as well as the projected mortgage, homeowners insurance and property taxes which should never add up to more than 36% of the gross income (i.e. pre-tax income). Using the 36% Rule:
|Monthly Pre-Tax Income||Remaining Income After Average Monthly Debt Payment||Maximum Monthly Mortgage Payment (including Property Taxes and Insurance) with the 36% Rule||Estimated Home Value|
Most markets today have few, if any, housing options under $200,000 which would require a monthly income of $5,000 or more to be affordable. The average monthly income of Millennials is below that and in some cases, well below that.
If you’re a millennial, it probably won’t shock you to learn that the average salary of a millennial today is an estimated 20% lower than the average salary that a baby boomer had at the same age (in real terms). What’s more, today’s Millennials are deeper in debt than their parents were at their age. Let’s take a closer look at the average salary of a millennial.
According to U.S. Census Bureau data, the median earnings for full-time workers age 18 to 34 were $35,845 in 1980. By 2000 the same cohort was earning $37,355. For the period of 2009-2013, however, full-time workers between 18 and 34 had median earnings of just $33,883.
This is not very positive for the potential of a Millennial individual buying a home. Obviously, couples would have a higher output provided they both work (and hold off on family for a bit). But, there is a significant shortage of homes that Millennials, now the largest segment of the population, can afford.
This is especially true in cities like New York or San Francisco. There are some cities however where Millennials are overcoming mortgage costs and buying homes. In a national survey, SmartAsset took a look through the data to find the cities where Millennials are buying homes. Millennials, for the purposes of this survey, were defined as those under the age of 35.
- No big cities – No big city cracks the top 10. The biggest city to crack the top 25 was Las Vegas at 22. In fact, seven of the top 10 largest cities are ranked in the bottom half. New York and L.A. in particular score poorly, ranking 148th and 153rd, respectively.
- Millennial homeownership dropping – Across the largest 200 cities, only 18 saw millennial homeownership rates increase from 2007. This means in many cities homeownership rates have not fully recovered from the recession.
Tips for First-Time Homebuyers
Buying your first home can be daunting. After all, it might be the biggest purchase of your life and you want to make sure you leave no stone unturned. The first step might be to talk to a financial planner to determine how buying a home fits in with your other financial goals.
Coming up with a down payment is one of the first things any homeowner should think about. Ideally people save 20% of the home value for a down payment. If you are struggling to do this, there are federal programs to help first-time home buyers. For example, you can get a FHA loan with only 3.5% down.
Depending on where you live, there may also be state or local government aid available. For example, Texas has the “My First Texas Home Program” to help first-time homebuyers in the Lone Star State.
Once you have found a house you are happy with, make sure to negotiate on the buying price. There are many factors you can negotiate on, like who pays certain closing costs. But if you are in a sellers’ market you may not have a lot of leverage. In that case you probably want to avoid getting into a bidding war. The worst-case scenario for any first-time homebuyer is that you end up buying a home you cannot afford.
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David WB Parker is a principal of Parker Associates of Jacksonville, Florida, marketing consultants to the real estate industry; President of PTC Computer Solutions, IT Specialist, and an active real estate sales professional with PARFAM REALTY based in Jacksonville, FL. He can be reached at 904-607-8763 or via email email@example.com.