5 Barriers to Millennial Homeownership—And One Way to Overcome Them‍!

The prospects of purchasing a home for the first time can seem impossible—especially if you’re a millennial. To put it bluntly, millennials face greater external barriers to homeownership than prior generations. 

Millennials have historically low homeownership rates despite entering the time in which many previous generations of Americans typically started buying homes. The low rates are due to the generation entering the workforce during the Great Recession of 2008, but there are plenty of other common barriers that bear some of the blame, too. The reasons are aplenty, but below are the top five most common barriers to homeownership and one way we can overcome them.

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1. Short Inventory

Many millennials prefer to move into areas – urban cores – with greater amenities and job opportunities available. However, most of these areas have less affordable housing, and the housing supply is inelastic, which negatively affects the homeownership rate. 

Additionally, regardless of location, there is great concern about the shortage of housing supply. This is especially true of starter homes, which are an important first step in building wealth. New home construction has not kept up with growing demand either. A low volume of single-family home construction is limiting the number of existing single-family homes for sale, which is driving up the cost of homes.

2. Debt

Compared with baby boomers and Gen Xers, millennials have been more likely to pursue higher education. But it has come at a cost, literally. Millennials have taken on significantly greater education debt than the prior two generations because the costs of higher education have risen faster than incomes. Even though education is tightly correlated to a higher likelihood of homeownership, the cost of education has risen so substantially that affects millennials’ ability to buy a home. After all, the average federal student loan debt balance is more than $37,000, according to the Federal Reserve. 

In a recent survey by American Student Assistance and the National Association of Realtors, 76 percent of respondents said education debt affected their decision to purchase a home, and 55 percent said it delayed starting a family.

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3. Burden of High Rent

The cost of renting is a huge subject nowadays, and it is a big expense as well. Arguably the biggest it’s ever been. Millennials carry the weight of a very heavy rent burden and pay a ton of money on rent. According to a study by RentCafe, millennials pay, on average, $92,600 in total rent by the time they turn 30. The median income earned between the ages of 22 and 30 is $206,600. However, this shows that millennials then paid 45% of this income in rent, which is more than the recommended 30% rent burden. This is still higher than Generation X, who had a 41% rent burden, and baby boomers with a 36% rent burden. Baby boomers paid $21,600 less than millennials did during the same 8-year period.

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4. Inflation and high interest rates

Homebuyers often wonder how much money they need to buy a home. These days, the answer is much more than before, thanks to high interest rates and inflation. Everyone became accustomed to 3% mortgage rates, and now they are 6% to 7%. 

How much does this impact you? Imagine this. If you secured a 30-year fixed mortgage on a $600,000 home at a 2.6% interest rate in 2021, you have the same monthly mortgage payment as someone that just bought a $392,000 home at a 6.2% interest rate. 

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5. Inability to save for a down payment

For many millennials, the need to save for a large down payment prevents them from entering the housing market. Not having the funds for a down payment often prevents upwards of 70% of millennials from buying a home—the most-cited barrier to homeownership. 

However, most people overestimate the percentage of the price of a home that is needed as a down payment, and only about a quarter of consumers are somewhat familiar with low down payment programs. Conventional, FHA, VA, and USDA loans are all options with a low down payment—all options worth exploring to overcome this common barrier.

Overcoming the barriers—a new path to homeownership!

Despite all these challenges, an estimated 9 out of 10 millennials still have homeownership on their so-called bucket list. While increasing the supply of affordable housing and building more homes overall is necessary, there must also be different paths toward home ownership. One path growing in popularity is co-buying a home. By pooling financial resources between groups of friends or family members, millennials can co-own properties and use the property to build wealth. Buying communal spaces together opens homeownership to people who are otherwise left out of the equation. By redesigning what traditional homeownership is, groups can build community and equity together.

Learn more about how Nestment can put you on the path to homeownership—despite the continued challenges being thrown your way.

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Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of the information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.

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