Should Millennials Buy a Home or Rent?
Industry experts weigh in on the trend of young professionals choosing to rent instead of buy
Home ownership has reached a five-decade low, according to a recent report by the U.S. Census Bureau, due in part to the fact that millennials have historically low ownership rates compared to other generations at that age.
Home ownership has always been a part of the American dream. So why aren’t more millennials willing to purchase a place to call home? Should they purchase homes or is it smarter for them to rent? There are several factors to consider.
The Relocation Factor
According to Josh Alpert, owner of Alpert Retirement Advising in Southfield, Mich., “After the housing crash of 2007, many millennials began to realize home ownership may not be quite the American dream as it has long been touted by realtors and organizations who encourage home ownership.”
In fact, Alpert doesn’t think home-buying is a good idea for the vast majority of millennials – at least not right now.
“Not only does it represent a huge financial risk, but it ties you down to a specific area – which may not be very convenient if a higher paying job which required relocation came calling.”
For those who want to focus on establishing their careers, Alpert tells GoodCall that he highly recommends renting.
Bill Golden, an independent real estate agent with RE/Max Metro Atlanta Cityside, does not believe that there is a “correct” answer, since he says it depends on each millennial’s individual circumstances. However, he raises concerns that are similar to Alpert’s.
“How long do you plan on staying in the area or in this particular home?” Golden asks. “Except in rare cases where you’d be buying into a rapidly appreciating market, or you’re renovating a total fixer-upper, if you don’t plan on staying more than a minimum of 2-3 years, it probably makes more sense for you to rent.”
The Lifestyle Factor
But on the other hand, for millennials who may be thinking about future family plans, Golden tells GoodCall that buying may be more advantageous than renting.
“If you’re planning on expanding your family, and the market is attractive for buyers, it may make sense to stretch a bit and buy a home now that would be suitable for a growing family,” he says
If not, Golden says you’re wasting money on rent and also guessing on the type of market you will encounter when you decide to enlarge your family and search for a house.
Another lifestyle consideration: If you’ve allocated a specific amount to spend each month, Golden explains that you’ll need to decide the best way to spend it.
“Depending on where you are looking to live, that may mean renting a 3-bedroom/2-bathroom house with a yard, or buying a 1-bedroom condominium.” If, for example, you have a dog, Golden says you should consider if you would prefer to just open the door and let him out into the yard, or if you want to go through the hassle of walking him on a leash every time he needs to go outside.
The Investment Factor
For investment-minded millennials, Golden says they might consider whether their home should be one of their investments, or whether they’re throwing away money in rent that could be used for investing.
“Of course, it’s also extremely important to remember that in buying a home, you are building equity as time goes by, both by paying down on your mortgage, and hopefully through appreciation of the property,” he says.
The Debt Factor
While some millennials may not want to purchase a home, many simply are not able to because of debt. Robyn Gilson, coach for Financial Education and vice president of Customer Experience at U.S. Bank, believes that lingering debt and financial worries play a critical role in the home-buying decision.
“Despite millennials’ well-publicized low rate of homeownership, our index found 76 percent feel being able to save for a home remains important to achieving an ideal home life – but only 37 percent feel satisfied in their ability to save.”
And Gilson says any millennials who are thinking about purchasing a home will need to understand and then start building their credit score so they can qualify for a mortgage when the time comes.
Perceived job security is another contributing factor, according to Matthew Carbray, Certified Financial Planner and managing partner for Ridgeline Financial Partners LLC and Carbray Staunton Financial Partners in Avon, Conn.
“And financially speaking, one needs ample money for a down payment, pre-paid items at a closing like property taxes, and also insurance and renovations,” Carbray tells GoodCall.
Even if you have a stable income, your home shouldn’t eat up all of your money.
“If it would take every penny of your savings to make a down payment on a home, and you’re not certain of your ability to replenish that in the future, you may want to factor that into your decision,” Golden warns.
“There are many loan programs out there that can help first-time home buyers with down payment assistance, or that don’t require a severed arm and leg in order to get a mortgage,” Golden says, but millennials should also consider their comfort level with the final estimate. He recommends getting pre-qualified for a mortgage. “That will enable you to make a more accurate comparison of what you can get for that money in a purchase versus a rental,” Golden explains.
So how much should millennials feel “comfortable” paying? The amount varies, but Laurie Samay, a certified financial planner and client service and portfolio manager with Palisades Hudson Financial Group in Scarsdale, N.Y., tells GoodCall, “I typically recommend that prospective buyers put down no less than 20% of the purchase price, not only to avoid triggering the private mortgage insurance requirement, but also to secure reduced interest rates and closing costs, smaller monthly payments and instant home equity.”
Samay says that interest rates are historically low and rent is skyrocketing, which would make homeownership attractive to millennials.
“That being said, a home is a huge purchase and demands substantial responsibility in terms of monthly payments and ongoing upkeep, so it’s important to be realistic when it comes to assessing whether you can and should purchase a home.”