When it comes to buying homes, young adults are moving at a turtle’s pace compared to earlier generations. But the decision to keep renting isn’t necessarily a bad one.
“The choice is more complex than people think,” said Teo Nicolais, an instructor at the Harvard Extension School who specializes in real estate. “From a purely financial standpoint, the correct move is to rent the apartment or home you need in your 20s and 30s.”
Millennials, he advises, would do well to pocket the savings renting generates versus owning and set it aside for a larger home in a location that better fits future needs, i.e. the family home out in suburbs.
In 2006, about half of 31 year olds owned their own homes. But in 2016, the age where half of adults owned their homes had risen to 36, according to Chris Porter, demographer with John Burns Real Estate Consulting.
Several things are driving the five-year lag in ownership. Young adults shoulder a large portion of the massive $1.5 trillion in student loan debt that has accumulated in the United States.
“It is getting harder for young people to dig out of that hole and save up for a downpayment,” said Myles Ma, editor at Policygenius Magazine in New York.
And while job prospects have improved in recent years for college graduates, Ma said the best jobs have concentrated in a handful of cities, causing housing costs in those areas to spiral beyond what median incomes can support.
“Denver is among the cities where it makes sense to rent,” Ma said.
Renting also provides flexibility that owning doesn’t, which is important for someone who is in the early years of a career or may need to move to pursue a better opportunity.
The real estate firm Zillow estimates a buyer in metro Denver won’t break even on a home purchase unless they stay at least two years and three months. That assumes a potential buyer is renting a home of comparable size to the one they are looking to buy.
And it assumes that home prices continue to rise. Home prices in metro Denver have shot up 65 percent this decade, according the S&P/Case-Shiller Home Price Index.
That is one of the biggest gains of any metro area in the country, and reflects the popularity of the region, a shortage of entry-level homes to buy, and a long stretch of mortgage rates at 4 percent and under, which allowed people to borrow more even if their incomes weren’t rising much.
“The price appreciation component involves a large degree of uncertainty, particularly if one purchases a home at the peak of the cycle,” said Chris Salavati, a housing economist with Apartment List in San Francisco.
Net migration has shown signs of slowing as more people fed up with high housing costs and congestion move out. Mortgage rates are at their highest levels in seven years, but home prices haven’t adjusted to reflect that reduced affordability.
“The crash in 2008 didn’t hurt those who were in for the long haul. It hurt young people who were trapped in homes they couldn’t get out of. They had to walk away from them,” Nicolais said.
Related Articles
-
Denver tech firm FullContact moving out of private office suite into WeWork’s Tabor Center co-working space
-
Saving for a down payment could take Colorado renters nearly 12 years
-
Growing Denver retail market not crushed by closure of eight Toys R Us stores, report says
-
Herbert Cook, former sporting goods owner and Colorado real-estate investor, dies at 93
-
The Denver Broncos mascot’s $23 million Silverthorne ranch is for sale
The poor timing resulted in a double whammy. Not only did those overextended buyers lose what they had, they couldn’t take advantage of the bargains that emerged at the start of the decade.
“They had the wrong home going into the recession and they couldn’t get into the right home after the recession,” Nicolais said.
Nicolais said there are several valid reasons for buying, but when a market is hot, too many people buy because of FOMO — fear of missing out. A key symptom of FOMO is stretching to buy a home that is too small and won’t fit future needs.
“A housing mismatch is a huge sink on the financial resources of a generation,” he said. “Renting eliminates that mismatch.”
