4 Obstacles that Keep Millennials from Buying Their First Homes

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Some might say that the real estate market is in limbo.

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.

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4 Obstacles Facing First-Time Homebuyers

1. Debt

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.

Related: Don’t Cry for Thee, First-Time Homebuyers

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.

Related: First-Time Homebuyer Credit – Is It Really a Free Lunch?

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!

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

15 Comments

  1. Hi Chris,

    Yes I believe you are on point as to assisting first home buyers.

    Amy Hoak at http://www.MarketWatch.com wrote “Why Millenials are hurting the Real Estate Recovery.”

    http://www.marketwatch.com/story/why-millennials-are-hurting-the-real-estate-recovery-2014-05-12/print

    1. Unemployment and low savings
    2. Low Credit Scores
    3. Student Debt
    4. Delaying Marriage and Family

    CNBC said rencently, “In a new survey of American adults commissioned by the National Endowment for Financial Education, half the respondents said retirement savings were their top financial goal, and just 13 percent said home ownership was a top priority. ”
    http://www.cnbc.com/id/101646498

    But very interestly, Gen Z has other opinions. See Move Over Millennials, Better Homes and Gardens Real Estate Reveals Homebuying Dreams of Gen Z Teens
    http://www.marketwatch.com/story/move-over-millennials-better-homes-and-gardens-real-estate-reveals-homebuying-dreams-of-gen-z-teens-2014-09-09?siteid=bigcharts&dist=bigcharts

    Well chosen locations, solid construction and good school districts will always rent well. Home ownership may be declining, so maybe Lease 2 Own plans may gather some momentum if credit is tight for young families.

    Nice article as always, Chris!

    • Chris Clothier

      Brian –

      Thanks for reading the article and linking to some quality statistics and other articles.

      The title of my article was changed by the editors. The original title referenced first-time home buyers. I think your reference to the CNBC article hits the intent of the article. Adults, and mostly first-time home buyers, are not responding right now to what have been historically good programs and markers to attract this demographic to the housing market.

      No matter what we choose to call them, first-time home buyers of every age are simply not getting into the market and they are going to be needed to drive the housing market.

      Chris

  2. You seem to be under the assumption that “real estate” will recover. This is not going to happen. And I mean that in the way which I think you, and others who think like you, mean it.

    That is: that the real estate collapse over the last seven-eight-nine years is just another anomaly-grade set-back in a general long term and virtually perpetual uptrend in historic real estate prices.

    That is what is unlikely to be true. What created ‘real estate as we know it’ was almost entirely the result of a single component – the US population bulge called the baby-boomers. That is ending and has been for some time. Something approaching a half million people per year have their sixty fifth birthday. Most have not saved sufficiently, nor invested well, and/or were substantially disadvantaged in the latest financial markets crisis. If they are looking to buy a house it is likely to be a smaller one – not a larger one. Many will become renters.

    And there is no ‘up and coming’ demographic to replace them. And at least as importantly: to embrace their view of their own future. Young adults do not see a family and a ‘home of our own’ as essentially a foregone conclusion in their lives. Many will become renters.

    Young adults in general have few jobs, no savings, and often substantial debt. Their lifestyles tend to embrace excess and as a result are much more expensive to maintain. Excess income does not become savings. Many will become renters

    Young adults marry later, if at all. And having children is not the mandate that it was for their grandparents in the 1960’s. I think we have created as much as perhaps an entire generation of Americans who are renters.

    You say: “If we’re to see real recovery in the real estate market, we need first-time buyers to start buying.”

    That is true – but it’s not going to happen.

    You say: “Why isn’t that happening when all signs say it should?”

    I say: You are badly mis-reading the demographics my friend.

    stephen
    ————

    • Regardless of wether people rent or buy demand for housing is the important factor. You describe the baby boomers as a driving force for our current real estate world. Now the millennials you describe as not getting married until later in life and not as family centric as in the past. This description seems to call for a larger demand for housing as there would be more households with less people getting married and settling down.
      I am a Millennial and although I am outside the statistical norm as I bought my first house at 21 and second primary residence last year at 27. I also know many folks my age and while many rent many also purchase homes either when they do get a family and settle down or when they can’t seem to make a relationship stick but want to knock off something to make themselves feel like they are growing. My perspective is in an area where you can buy a decent house in the $100,000 range so that is a large factor..

      • Chris Clothier

        Hey Kyle –

        As always – your make some good comments and I appreciate you reading the article. Millennials was not really the direction of the article when I wrote it, but the headline was changed to reflect more of a focus on Millennials. That being said, you highlighted a point that is kind of a new phenomenon and unique to this demographic. As a whole, the data shows they are much happier waiting. Waiting for marriage, waiting for the first home purchase, waiting for the perfect job before they commit to the long-term. It means that everything from major purchases, major life decisions and settling down are being delayed. It has even been evident in the slow down of population growth over the last decade or so.

        Great input and insight from you! – Chris

    • Chris Clothier

      Stephen –

      First, thanks for reading the article and taking time to leave your thoughts. I can’t say I understood all of the comments, especially the parts and me and what people like me think. Not really sure if you were referring to me as an investor, an entrepreneur, author, public speaker or a participant in masterminds with some pretty smart damn people. Certainly people who are a lot smarter than me. So, when you reference “me” and “people who think like me”, I’m not sure exactly what you were referencing.

      As for the housing market, you make some blanket statements as if there is one housing market in the U.S. We all know that is not the case. You say that a housing market recovery is not going to happen. There are literally thousands of housing markets around the country. Some never experienced a downturn in the first place. Most have already recovered lost value as well as sales volume and others lost sales volume and value and have only recovered in fits and starts.

      The housing recovery that many of us in business know has to happen is one where homes are being built again at a predictable pace. The home building starts number is both a manufacturing indicator and a consumer sentiment indicator and homebuilding touches on so many other sectors of our economy that is imperative that we get it going again. In some markets, it already has and in others housing starts are way behind. We will see if those markets that really need it will find any demand from this importance demographic.

      • Why would it be imperative? We over-built for a long time and the economy is working through the glut. Student loans may be a problem, but more importantly unchecked Federal regulations are chocking the life of the economy. Business investment is down and no one is hiring full-time workers. Student loans are a minor part of the problem, but they have only been made worse by the Federal supports that have already been put in place that cause higher tuition requiring bigger loans. Our population isn’t growing much so new housing is not really needed. The rest of the economy is going to have to figure itself out.

        • Chris Clothier

          Hey Alan –

          Thanks for reading the article and the comments and then leaving your comments. So again, there are individual markets around the country – not one big housing market. Going back to 1959 – not just the last 10-20 years, but over a 55 year period!!! – the U.S. as a total has averaged 1.45 Million housing starts a month. For the past 7 years, as a nation we are averaging less than 1 million housing starts a month.

          Population growth has slowed, but not to the point where we need to stop building houses. Again, this is going to be localized to each individual housing market and there are multiple different markets in most major cities. Some will have housing booms and some will not and some will NEED those housing booms to jump start their local economies.

          That is why it is imperative to get housing starts going again. So many parts of the economy are touched by housing. It is a huge labor driver. It is a hue durable goods orders driver. Housing starts are needed to jumpstart these parts of the economy. Whether we agree on the need or not, that is how our economy is built and housing starts boost many other parts of the economy.

  3. I have been observing the Millennials for several years now. They represent a good portion of my rental pool (and I happen to have a 25yr old). I see high salaries and a willingness to pay for a nice place to live. They don’t want to be locked in to one geographic area, they are delaying marriage and kids – the traditional driver for purchase.

    Even if they would like to own, the memories of price declines are too fresh. What if they want to take a job in another state and find themselves underwater? It’s just not worth the risk. The turn-over that I have seen over the past several years has solely been the result of the birth of a child and it’s rare to see that under 30 yrs of age.

    We still need inventory for this generation – it just happens to be rentals. I am thrilled with this phenom as I get great tenants. They are well-paid professionals who decorate with Pottery Barn, Restoration Hardware, etc. In other words, their rentals look great! If I do have a turnover, I have zero issues with showing and renting upon 30 days notice. This means zero down-time or fix-up. I’m loving it!

    In addition, new construction nearby is very expensive and rents very high – this pulls my rents up! This, of course, is local and not reflective of many regions (? – I don’t follow other regions). My kid bought a rental at age 20 (for me to manage of course) and has no intention of leaving his luxo high-rise rental in a trendy area to actually live in his rental or buy a home of his own. He is in the DC area now, but has a “world-wide” outlook as far as future employment.

    • Chris Clothier

      Hey Cheryl –

      Thanks for the comments. I really liked the one thing you said at the end of your comments and I think it is most indicative of this generation. They have a world-wide view and very much like their freedom to move about. This will definitely change the way housing starts are viewed and planned for the future.

      Chris

  4. Are you sure you want my opinion? Right now no one is and our colleges and universities can see that most people don’t care what the price is for a college education so tuition has been going up very rapidly for decades. There’s no reason for this at all. First, I’d say drop any and all Federal loan forgiveness programs. There’s no reason the Federal government should be paying for individuals education. Second, I’d say quit with the federal loans and lift the bankruptcy protections on student loans. People need to be responsible for their own decisions. Lenders need to be responsible for the loans they make. If these changes are made there will be many fewer loans written, and higher ed institutions will need to try to be somewhat price competitive – problem solved.

  5. Chris,

    Thanks for the article. As a recently married, new home buying millennial, I realize I’m a bit of an outlier. It’s difficult to make sense out of buying homes if folks want to be mobile, that’s a great point and that’s a hard one to get around. But outside of that, what’s it going to take to get millennials to buy homes? I think it’s convincing them of the economics. Most folks my age are starting to see why real estate investment is and will be profitable after getting over the hangover from the housing crash years back. Granted, I do live in Central Virginia where housing has come back for the most part.

    Aside from home values increasing, there’s a number of things (AirBnB, renting out a room in your house, tax write offs) that home owners can participate in to subsidize their monthly payment, add value, and more quickly pay off their mortgage. Ultimately, I think when folks learn this and get over the hangover, the market will further recover. Thoughts?

  6. As all business owners need to be able to market well, I discovered this professional marketing advice article:
    http://www.marketingprofs.com/articles/2014/26042/six-tactics-for-successfully-marketing-to-millennials?adref=nlt091714
    1. Redirect your online advertising budget
    2. Understand—and harness—Millennials’ social media sharing tendencies
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