August 20, 2013 · 3 Comments
Due largely in part to the housing sector, Generation Y has been subjected to one of the most turbulent economic periods in our nation’s great history. Otherwise known as Millennials, this demographic cohort consists of individuals born somewhere between the early 1980s and the early 2000s. Those within the parameters of this generation are likely on the verge of buying a home. Of particular concern, however, are the market conditions in which they must facilitate such an important transaction.
The housing sector decline may have resulted in record-low mortgage rates and home prices, but the current recovery has witnessed homes appreciate to where they were prior to the bubble. As a result, prospective first-time homebuyers are subjected to a myriad of challenges. Millennials, in particular, will find buying a home to be much harder than in previous generations.
“The aspiration for homeownership is still there, but they also recognize it might take a little longer for them to buy,” says Gary Painter, director of research at the Lusk Center for Real Estate at the University of Southern California in Los Angeles.
While the factors of buying a home have remained relatively consistent between generations, policy restrictions have made it increasingly difficult for this particular time period. As a result, prospective first-time homebuyers have found themselves facing the following challenges:
Strict Credit Standards For Buying a Home
Due to their relatively young age, individuals that fall into the Millennial cohort are greatly influenced by tight credit restrictions. Their age has given them less time to establish a strong line of credit or to maneuver around previous transgressions from their adolescent years. More specifically, student loans still burden a large portion of young house hunters.
According to Doug Perlson, founder and CEO of online real estate firm RealDirect in New York, “Millennials, especially if they have been underemployed and have student loan debt, should check their credit report and do what they can to improve their credit score.”
Scott Spann, a financial planner with Financial Finesse, says student loan debt can be a challenge for Gen Y borrowers. “The size of the debt itself isn’t necessarily a problem, but the monthly payments factor into the debt-to-income ratio that lenders evaluate,” says Spann.
Saving For a Down Payment
Perhaps the most daunting task, when buying a home, is saving up enough money for a sizeable down payment. Due largely in part to their socioeconomic status, it is hard for generation Y to acquire enough money for a down payment. Often times they are just graduating from college and entertaining an entry-level work position. Typical, entry-level positions are not adequate to supplement a down payment for a house, especially when you factor in other living expenses.
As a result, first-time buyers often receive supplemental income from their parents or relatives. The National Association of Realtors (NAR) has acknowledged that 24 percent of first-time buyers in 2012 were the recipients of a gift from a relative or friend and 6 percent received a loan from a relative or friend.
According to Walter Molony, economic issues media manager for NAR “We’ve heard about a trend in the past couple of years from our members in which parents pay cash to buy a house for their children and then offer them a mortgage with better terms than the bank would provide.”
Lack of Job Stability
Despite already having been subjected to financial obstacles, Generation Y buyers have a distinct lack of job stability. “A big issue is expected mobility,” says Spann. “If you have a stable job or lots of opportunities in the same area then it almost makes more sense to buy than to rent, but if you are moving in the next two years you shouldn’t expect rapid appreciation in your home value and you should probably rent.”