Although the housing market continues to recover, there’s one important segment of the market that is lagging behind — first-time home buyers. Commonly known as Gen Next, Gen Y and the Millennials, this group makes up that part of the population that was born after 1980.
At first blush, many would think that people in their prime earning years drive the housing market and account for the majority of home sales. But it’s actually the younger ones, those just starting out, who, through new household formations, purchase most of the homes sold each year. A recent study by the National Association of Realtors showed that home buyers under age 33 bought more homes than Gen X (34 to 48), Boomers (49 to 67) and the Silent Generation (68 to 88). Furthermore, the vast majority of buyers under the age of 33 (76 percent) are first-time home buyers.
Unfortunately, the number of first-time buyers has fallen considerably over the past several years. This severely limits a recovery for the housing market and is harmful to the economy as a whole. New household formation not only results in the sale of a house, but it also triggers all sorts of other activities, purchases like furniture, appliances and carpet. It is estimated that these goods and services contribute approximately $145,000 to the economy for each new home.
In the 1990s, the percentage of 18- to 34-year-olds who owned homes was about 15 to 16 percent. During the last couple of years, the home ownership rate for that group had fallen to 13 percent, which translates into millions of homes not being built and/or sold. Multiply each of those homes by the value of the house, along with the $145,000 in other purchases generated by the home sale, and you can quickly see the magnitude of how it hurts the economy.
So, why aren’t first-time buyers stepping up to the plate? For the most part, there are three reasons. First, many are having trouble finding a good job, or any job at all. Second, a sizable number of those under 33 have massive student loan debt. It’s far and away the leading cause of why young Americans don’t feel they can afford a house. Third, when the housing bubble burst, it took the bloom off the rose with respect to the financial security associated with home ownership. No longer do dads universally recommend that their kids buy a house. Now, some of them suggest renting for a while.
But, even with the headwinds facing first-time buyers, current market conditions are really ripe for the building of wealth through home ownership. Mortgage interest rates are near all-time lows and home prices have fully corrected from the artificially high prices experienced during the boom. As a result, low prices and low mortgage rates make it a great time to buy.
Plus, mortgage qualification requirements have started to ease. Right after the bubble burst, banks really tightened up, and you needed stellar credit scores, along with a 20 percent down payment, to buy a house. That kept a lot of people, especially first-time buyers, out of the market.
So, if you wanted to buy a house, but didn’t think you could, now might be the time to take another look. Here are some home-buying tips and things to consider, especially if you’re a first-time buyer:
See a mortgage banker: Before you do anything, determine what options you have for financing a house. You’ll probably find out that your monthly payment and the amount of money down you need is less than you think. On a conventional loan, it’s often no longer necessary to have that big 20 percent down payment. For a Federal Housing Administration loan, you might only need 3.5 percent, and with a Veterans Administration mortgage, you can get into a house with nothing down! Also, don’t try to prequalify yourself for a loan on some website. Those tools are almost always inaccurate and incomplete. Only a conversation with a real, live mortgage banker can give you the detail and depth of knowledge necessary to reveal your best lending opportunities.
Understand the benefits of buying versus renting: Many young people think it’s cheaper to rent than it is to buy. Well, unless you plan on moving in less than a couple of years, renting is vastly more expensive than buying. Here’s why: Let’s say the purchase price of a house is $400,000, but the cost to rent the same house is $2,000 per month, and you make the other following assumptions: 20 percent down payment to purchase, 4.5 percent 30-year fixed mortgage rate, 28 percent income tax bracket, 3 percent growth in the value of the house, rental rates and return on your money, 2 percent rate of inflation and $4,600 in real estate taxes. There are some other minor variables you can add in, but these will be the big factors in determining whether it’s cheaper to buy or rent.
Based on these assumptions, it would take only three years before the cost of renting would start to exceed the cost of buying. If you stayed in the home for five years, the total cost of buying would be $105,000; whereas the total cost of renting would be $135,000. After 10 years, the cost would be $185,000 to buy and $312,000 to rent. By the time 15 years rolled around, you would have spent $306,000 more by deciding to rent, rather than buying. Over the 30-year life of your mortgage, renting would cost almost $1 million more than buying.
Don’t try to go it alone: Many in the younger generation are fiercely independent and have come to believe that, with the aid of a smartphone, they can accomplish just about anything on their own. While it’s true that the vast amount of data and information available on the Internet makes it possible to do more than ever before, there is still a need to tap the experience and wisdom of professionals to complete something as complicated as buying a home.
That doesn’t mean you need to run out and contact a real estate agent right off the bat. The various home-buying websites can be a great way to get started with the thrill of the hunt for a new home. But just remember that not everything you read on the Internet is true. So, after you make the first cut, get a good real estate agent to show you around and help navigate you through the home-buying process.
Hopefully, the economy will soon get in gear, and new household formation will get back on track. If housing is to make a full and sustainable recovery, first-time home buyers are an indispensable part of the mix. With current market conditions, the table is set, so we expect 2015 will be a banner year for a new generation of homeowners.
Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is McWilliams@BobDonna.com.