4 Obstacles that Keep Millennials from Buying Their First Homes
Some might say that the real estate market is in limbo.
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Though it’s recovering from the disastrous crash around 2007 and in the following years, the market isn’t yet fully stable. It stops and starts. Even with mortgage rates at an all-time low to entice buyers, the market is still lethargic. While we all know that real estate is hyper-local and different parts of the country are recovering at different paces, the question about investors vs. homebuyers still lingers over most markets.
In the past, the real estate market has been able to find new life from first-time homebuyers, but that doesn't seem to be the case in 2014. Even with mortgage rates in a good place for buyers, a lack of lending programs and the difficulty of loan approval for first-time homebuyers makes things difficult. Add to that the varying appraisal rules and arbitrary application of how properties are appraised, and it leads to a tough first-time buying environment. The buyers have trouble getting loans, and those who do can find a hard time getting the property they are buying to appraise.
First-time buyers are in a tough spot, and yet they’re also the key to the recovery of the real estate market. They have the ability to make a massive impact on the market — but most people with the potential to become first-time homeowners aren’t taking the leap.
For the market, that’s a distinct problem. While we as real estate investors enjoy our returns from renting and providing an alternative to home ownership, we’re not hurting in most cases to find tenants. My company’s most recent data found that houses in Memphis were renting on average in 37 days and well above market rent data. In Dallas, vacant properties are renting in just over 18 days, and it is almost impossible to know market rent because the rates are going up so quickly — and the same goes for Houston. On average, rental homes are moving very quickly and the demand for quality rentals is growing.
If we’re to see real recovery in the real estate market, we need first-time buyers to start buying. We need first-time homebuyers who have been renting their housing to move out of the rental market and into the buying market. Even small percentages of movement can have a massive impact on a housing market.
Why isn’t that happening when all signs say it should? A lot of the reasons have nothing to do with real estate.
4 Obstacles Facing First-Time Homebuyers
While not all first-time homebuyers are millennials, many are college graduates, and student debt continues to rise in the United States. According to Forbes, we've exceeded $1 trillion in student loan debt in our country. From 2005 to 2012, there was a 58% increase in the average amount of student loans.
Of the student loan balance, over 11% is considered delinquent or defaulted. That's been going up since 2003, and it's the highest delinquency rate across all forms of debt.
While higher education used to be a sign of future success, current students are finding it a burden, especially when they are unable to get jobs that pay living wages, let alone compensate for loan payments. Some graduates find themselves wishing they'd skipped college and worked right out of high school. Those repaying student debt have a homeownership rate 36% lower than that of others. And unlike other forms of debt, student debt isn't usually forgiven in bankruptcy.
Student debt is a burden that prevents young Americans from saving for the future, starting small businesses and buying homes. It’s economically crippling on the individual and on the national level. Student debt is a problem that many Americans are concerned about, and President Obama signed an executive order this month that could allow millions of students to receive student debt relief.
With all the facts about student debt, the one piece of data that is most over-looked is the number of people carrying student debt who actually never finished their degree. They left college with the debt and without the benefit of the degree! The number of students entering college and using student debt assistance has grown to over 56%, while the number of students graduating from for-profit colleges has dropped to 22%. The average amount of student debt in 2012 (the last year the data was printed) was $29,400.
2. Unemployment and Underemployment
Not only do potential homebuyers often struggle under the weight of debt, but the job market has not helped the situation.
Millennials with college degrees are both underemployed and unemployed. There is a significant imbalance between qualifications and wages earned. Many companies nationwide have cut out full-time employees, making it difficult for people to make ends meet, let alone save up for a downpayment on a home.
What is astonishing is that as the stock market reaches new heights (most people will correlate the rising stock market as a rising tide of income and opportunity), it is NOT translating to the average person.
Companies have been buying back stock at a record pace over the past two years. The growth of the stock market has had a great impact on the companies’ bottom lines as they see their stock prices go up, but the growth has helped relatively few. The increasing value has not corresponding in re-investment as far as new jobs or rising pay-scales for existing jobs on a large scale. So it has been disappointing to say the least to be watching a stock market continuing to rise while job creation and wage growth continue to stagnate.
3. Transient Lifestyle
Even if potential homebuyers can find a job, very rarely is it guaranteed to stay that way.
In general, the lifestyle of many has grown more transient — people move from city to city in search of better job opportunities and don’t settle in a career that spans decades. More and more homebuyers are finding it easier to rent – even rent upscale and for pricing above what they would pay if they were to purchase – simply to have the flexibility to pick up and move quickly.
4. Mortgage Approval
Debt and employment struggles all add up to this one. Thanks to having to make monthly loan payments and meet other costs of living on often meager salaries, would-be homebuyers have a tough time saving for a down payment on a home and getting approved for loans.
Some lenders have attempted to attract buyers by lowering credit score guidelines — but they make up for it by increasing requirements in other areas, whether it’s requiring assets and documentation or simple upping their rates. Add to that the debt ratio limits, and first-time home buyers get crushed on student debt!
It is a merry-go-round that is not very merry and will most likely limit the first-time home buyers for the foreseeable future.
Well, Now What?
The plight of millennials, despite the claims from some, is not a case of laziness or poor judgment.
Many are simply following the tradition of pursuing higher education with the belief that they will be able to get good jobs afterwards. That’s not a bad thing, but the reality is uncertain in this day and age. They’ve done what they’ve been taught was the right path, and the payoff has not compensated for the cost. So what is the answer? I don’t think any of us know the exact answer, and it will probably take both private and government effort to get first-time homebuyers back in the market and driving.
The real estate market needs first-time homebuyers to reach a point of recovery and long-term stability.
What do you think the solution is to jump-start this part of the market?
Share your opinion with us in the comments, and let’s get some dialogue going!