Millennials: Smart or Broke?

The millennials are not buying houses at the same rate their parents did. They are choosing to rent, and we can attribute this to a variety of reasons.

The millennial generation is not defined by precise dates, but it generally covers those who are currently older teenagers to those in their early 30s. Here, we are talking about young adults in their 20s and early 30s.

The statistics are showing that millennials are just not that interested in personal home ownership. If they are, then they probably can’t afford it.

A recent report by Zillow showed that the typical young adult is renting for six years before buying a home, as opposed to just 2.6 years in the early 1970s. Perhaps getting married and having kids at a later age plays into this, but it is far from the only thing.

There are obviously a lot of factors that come into play when deciding to buy a house.

Some of the advantages of home ownership are obvious: You establish a base. You get to feel the pride of owning your own home, even if your mortgage company may technically own it. You can do what you want to your own home, as long as you are not violating any laws or homeowner association rules.

Buying a house for the long term has acted as something of a long-term savings plan for many. Unfortunately, some people just aren’t disciplined enough to put extra money away. They are not good savers.

But paying your mortgage every month is a way to save, at least in a sense. Each month, you are paying down the principal balance on your loan. Eventually, even if it is after 30 years, you end up owning a home outright. This is assuming you stay in the house and don’t refinance to a longer term.

The disadvantages of home ownership are a little less obvious, although probably more obvious since the housing bubble imploded several years ago. Just as some people want to establish themselves in a location, some choose to rent just so they have the mobility to move anywhere they want, and quickly.

In today’s world of less-stable employment, renting is an advantage for many young people who can get up and leave on short notice. They could move across the country for a great job and not have to worry about what to do with a house.

There are also other reasons not to buy and own a house for your personal residence. Sometimes these reasons are more obvious to those who already own, or have owned, a house.

Home Ownership: The American Dream?

Unfortunately, our society has put the idea into our heads that owning a house is the American Dream. But if that were the case, this would imply that renters are not living, or cannot live, the American Dream.

This false fantasy of living the American Dream did not help the situation when there was a massive housing bubble in the U.S. in the 2000s. It was certainly fueled by a loose monetary policy and artificially low interest rates established by the Federal Reserve. And the government encouraged easy lending and borrowing for housing with its policies and government agencies.

About a decade ago, people who simply should not have been were buying houses. They never should have been given a loan based on their credit and lack of money.

The so-called American Dream was shattered for many when the housing bubble popped. But that dream was a fantasy all along. Even if housing prices hadn’t dropped, a lot of people still would have been in over their heads. They just simply could not afford the payments and the maintenance.

I think many new homeowners underestimate the costs of owning a house. It isn’t just the mortgage payment; it is the property taxes, association fees, insurance… and the maintenance is the most underestimated thing.

You are all of a sudden buying a lawn mower and getting maintenance on air conditioners, sprinkler systems, fireplaces, appliances, etc. And these are just things to maintain what you already have — it doesn’t include additions or upgrades.

For some, particularly young adults, I think it often makes sense to rent. You should not be going into debt for hundreds of thousands of dollars. It is an opportunity to get rid of any debt you may have — including student loans — and to actually save some money.

If you can rent an apartment and share it with a couple of roommates, you are probably going to save some money, assuming you make a decent income and you don’t spend ridiculously in other areas.

Therefore, the lack of home ownership for millennials may actually be a good sign. Maybe it is just showing they are being financially smart.

You Can’t Buy if You Don’t Have Money

Of course, some millennials are not buying houses for the simple reason that they just can’t afford it. They are essentially broke. They don’t have any money for a down payment — even a small one. They don’t have money for closing costs. And if they did get into a house, they wouldn’t have any money to maintain it.

Since the economic downturn in 2008, younger people have suffered more than others. Unemployment rates are higher for young adults, and there seems to be a major wage gap.

The millennials should not be happy with the government, and it seems it is showing. Even if they can’t quite articulate it, I think millennials know they are getting the short end of the stick in many cases.

They get to work hard and pay payroll taxes for programs they may never receive a dime from. It is actually amazing they haven’t revolted more at this point.

Even young adults who are employed at decent jobs are still finding it a struggle to get ahead. Life is expensive, thanks to taxes, government regulations, and Federal Reserve inflation. Wages lag behind the increases in almost everything else.

If you look at a place such as Silicon Valley in California, the median home price exceeds $1 million in many spots. How could any young person afford this unless he started out making six figures almost immediately?

As the Zillow study found, today’s first-time buyers in the U.S. buy homes that cost 2.6 times their annual income. In the 1970s, first-time buyers paid about 1.7 times their annual income.

The bottom line is that many millennials simply don’t have enough money saved to buy a decent first house. They also do not have established careers that give them the confidence to buy. If the money isn’t there, they aren’t going to buy.

What is Going on With Millennials?

So are they smart, or are they broke? I think the answer is generally yes to both. They don’t have the money to buy into the “American Dream.” I’m sure many young adults could stretch their budgets to buy a starter home, but it seems that a majority are choosing not to. In most cases, this is probably a wise choice.

It is important to differentiate between buying a house as an investment and buying as a consumer good. Buying investment property can be quite profitable over the long run if it is done right.

In the past, and still to some extent today, too many people looked at buying a house to live in as an investment. It may be something like a forced savings plan, as discussed above, but you shouldn’t buy a big and expensive house to make money. You buy it to enjoy it. If the lifestyle doesn’t matter to you, you will be better off financially in most cases if you just rent a small apartment.

If you are a young adult with a decent and stable job, then my advice is to not get into debt in most cases.

If you are single without kids and you want to buy a house, then get a roommate for a few years. You can get the roommate to pay the interest on your loan. You can pay for the principal, the property taxes, the insurance, and the maintenance.

It is reported that millennials worldwide have spending power in the trillions of dollars. Just because they are not spending big on housing doesn’t mean this generation does not have a big impact on today’s economy.

The millennials lived through a deep recession in 2008. In many ways, I think they are more cautious than their parents. They are more fiscally conservative with their money. We should hope this continues into the future. They do not need to get in over their heads in major housing debt.

If there are any young adults with significant savings, I would recommend buying real estate for investment purposes. This takes a long-term vision.

Actually, I would recommend this strategy for almost any age. It is a way to diversify your financial portfolio.

But don’t just buy a house because you think it is part of the American Dream.

Until next time,

Geoffrey Pike for Wealth Daily