Should Millennials Rent Or Buy?
Erica Gellerman4-Minute Read
January 31, 2020
Homeownership has long been billed as part of the American dream, but as millennials get to the age where previous generations have purchased homes, should they follow suit? Millennials are facing a different financial situation from what other generations have dealt with, which impacts their ability to buy a home. Because of this, is it better for them to rent or buy?
What Percentage Of Millennials Own Homes?
The headlines that you may have seen proclaiming that millennials aren’t buying homes aren’t completely true. As of the third quarter of 2019, 37.5% of millennials under age 35 are homeowners. So millennials are, in fact, buying homes. But even with more than one in three millennials buying a home, they are less likely to be homeowners than Gen X or baby boomers were at the same stage in their life.
But it’s not because millennials don’t want to buy homes – they do! A 2018 report from Apartment List showed that nine out of 10 millennial renters want to own a home. So why aren’t they homeowners?
Why Millennials Are Renting?
Why are so many millennials still renting, even though an overwhelming majority of them would prefer to own a home? There’s no singular reason that millennials aren’t buying homes at the same rate other generations have, but there are some major themes that contribute to the situation:
- No down payment savings: It’s not the monthly mortgage payment that’s worrying millennials, it’s the down payment. 62% of millennials haven’t saved enough for a down payment, which is keeping them from their home buying goals.
- High-interest debt: According to Northwestern Mutual’s 2019 Planning and Progress Study, millennials have an average of $27,00 of debt and the majority of it is credit card debt. This high-interest debt could be keeping millennials from putting enough away for a substantial down payment.
- Lack of affordability: Median home prices are rising faster than average weekly wages. This means that even when millennials try their best to save, they’re fighting an uphill battle with home pricing that is quickly becoming unaffordable.
Financial pressure is regularly cited by millennials as being the reason they are unable to purchase a home. In a LendEDU survey, 88% cite their financial situation as the reason they aren’t able to buy a home. That included a lack of savings, low income, overwhelming debt and poor credit.
Is Renting Smarter Than Buying?
For a lot of people, buying a home is one of their big life goals. A place that they can make their own, without having to ask a landlord if they can finally remove the peeling linoleum from the kitchen floor.
While almost all millennials want to buy a home, what’s the smarter decision – buying or renting?
There are multiple factors that go into the decision, including your lifestyle goals and your financial situation. If you’re trying to decide whether it’s smarter to rent or buy, it’s a good idea to consider the following questions:
How Much Flexibility Do You Need?
Buying a home is a big financial commitment, one that can leave you tied to an area for a long time. Are you planning to stay in the area or is there a chance you might want to move for your job, to go to school, or to try out another area of the country (or world)?
If you want that flexibility to make changes in your life, renting is more conducive to that lifestyle. Renting makes moving less complex and difficult. If you want to put down roots in a town and don’t plan on leaving, buying could be the way to go.
How Long Will You Own The Home?
Buying and selling a home comes with a lot of fees. Closing costs can add 3% – 6% to the price of the home when you buy it. If you’re buying a home with a $200,000 mortgage, you could be spending $6,000 – $12,000 on the closing costs, which doesn’t include your down payment! A seller doesn’t get a better deal either. When you go to sell, not only do you have the cost of getting the home ready to sell, you’ll also likely pay real estate commission, which is usually 5% – 6% of the sales price.
These are big expenses that come with buying a selling, but the longer you own the home, the more time you have to spread out the cost. For example, say you decided to buy a home with a $200,000 mortgage and you pay $9,000 in closing costs one year. Two years later, you decide to sell it and end up having to pay real estate agents’ commission of $12,000. Spread over only 2 years, the fees are significant.
If instead, you end up owning the home for 10 – 15 years, you’re spreading the fees out over a longer period of time. That may make owning a better decision.
The New York Times has an excellent rent versus buy calculator that can help you see the effects this has on your decision whether or not to buy a home.
Can You Afford Maintenance Costs, Property Tax And Insurance?
The cost of owning a home is more than just your mortgage payments. When considering a home and your budget, think about what other costs you’ll have. Can you comfortably cover your property tax payments and insurance?
And are you prepared for maintenance costs? In 2018, homeowners spent an average of $1,105 on home maintenance, and $7,560 on home improvement projects, according to HomeAdvisor. If you’re not in a good financial place, these costs can create a burden that you may not be prepared to deal with.
Do You Have Enough Saved?
Buying a home requires a big cash outlay – will you be completely draining your bank accounts to make your purchase? Because spending so much of your hard-earned savings when you buy a home can be scary, it’s a good idea to be sure you still have some money in the bank for emergencies or maintenance that needs to be done before you move in. If you are completely wiping out your savings, you might want to reassess your home buying budget or consider waiting until you have a bit more of a cushion ready to help you step confidently into homeownership.
Most millennials want to buy a home, though many recognize that they aren’t in the best financial situation to do so. Whether it’s better for them to buy or rent depends on lifestyle goals and their current financial situation.
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