With the last recession still fresh in our memories, and some still trapped in its wake, first-time homebuyers are taking longer than ever to purchase a house. Millennials, in particular, are still strapped for cash and perhaps unsettled in their careers, which may explain why some are waiting longer to buy. According to Zillow, the median age of first-time buyers in today’s market is 33, three years older than the last generation.
In the early 1970s, people would typically rent for about 2.5 years before actually purchasing their first home. Fast forward to today, and first-time homebuyers are averaging about six years of renting until they feel comfortable enough to make their first purchase. What has changed to create such a drastic difference in first-time buyer trends?
The answer is relatively simple: the financial hardships left over from the Great Recession. The current delay is directly correlated to the financial hardships that sprang up over the last decade. Record high rents, student debt, and job uncertainty have made it increasingly hard for an entire generation to save enough money for a down payment.
These hardships shed some light onto the reasons why homeownership has started to decline. According to the U.S. Census Bureau, the homeownership rate is at a 48-year low. Only 63.4 percent of the U.S. population owns.
Of course, those that do take the plunge are confronted with sticker shock. The price of owning a home is substantially more than it was in the 1970s. At that time, the price of starter homes represented an average of 1.7 times more than a person’s yearly income. Today, homes are about 2.6 times the income of the average first-time buyer. Still, that hasn’t deterred everyone from buying.
Millennials are “still very interested in buying a house, but they’re delaying that decision,” said Svenja Gudell, chief economist at Zillow. “Once they start having kids, they begin looking for homes. We’re also finding that—given how much rental rates are currently rising—a lot of folks are having a hard time saving for a down payment and qualifying for a mortgage.”
While a select few may be able to rely on help from their parents for down payment assistance, the overwhelming majority of Millennials depend on personal savings. Of particular concern, however, is how difficult it has become to establish a savings in the face of increasing rents. The cost of renting has made it nearly impossible for even the most frugal of Millennials to save enough money for a down payment. Data suggests that the national average for rental prices has increased twice as fast as hourly wage growth.
With income unable to keep up with rental asking prices, first-time buyers are required to dedicate more income to their rental agreement. The average renter, between the ages of 25 to 34, spends more than 30 percent of their incomes on rent, the highest percentage ever, up from pre-housing boom levels of around 24.4 percent. According to Harvard University’s Joint Center of Housing Studies, that number is a financial burden.
Of course, 30 percent is just an average. There are areas where rent consumers even more income. Renters in Los Angeles spend nearly 50 percent of their income on rent. Renters in New York, New Jersey and Miami have gotten used to spending about 41-45 percent of their income on rent.
In addition to savings, Millennials point to job security as a leading reason why they are waiting longer to purchase a home. Job security, for all intents and purposes, has become a leading consideration for first-time buyers. After bearing witness to the mistakes of the previous generation, Millennials are more inclined to be more cautious. They know, second-hand, how much trouble an unaffordable mortgage can lead to.
According to The Money Source, a premier mortgage lender and servicer, buyers had averaged nearly 4.5 years in their field of work and had held their current job for slightly more than three years. These numbers suggest that people are willing to establish themselves in a career before they make the transition to homeownership.
Of course, with all that is preventing first-time buyers from actively participating in the market, there is still a strong desire to own. It just so happens that their timelines are slightly longer than the last generation.