But, home ownership is down among the Millennial generation as reported by Business Insider and many other news outlets.
There are lots of reasons why this could be happening, tighter credit standards, change in lifestyle, lower incomes out of college, high student debt and the fact that millennials are marrying later and having children later in life.
And certainly coming out of one of the worst recessions in US history, many millennials lived that and has shaped their lifestyle and values.
Parents losing homes, racking up student debt to go to college, and difficulty in securing a job out after graduating are fresh in the millennials mind.
But whatever the reason the value of owning a home is missed by millennials.
The True Value of Owning a Home for Millennials
Home ownership has been instrumental in helping to build wealth in past generations. Now I am not saying that home ownership is going to make you rich, but it is going to help provide some financial stability as you age and head into retirement.
As with past generations there will always be the question is it cheaper to buy a home versus renting. In many cases today you will find with the tax breaks a home buyer gets, the mortgage, insurance, taxes and PMI can be lower than the cost of renting.
But at the end of the day, once you add maintenance…. over the life of renting a property, renting is cheaper….. short term. The longer you own the home the more financially beneficial it becomes.
So where is the value of owning a home?
You Have To Live Somewhere
Let’s face it someday you have to move out of your parents house and eventually living with roommates can get tiresome. Modest rents in the suburbs north of Boston can easily run from $1700 to $2500 a month. Depending on your circumstances that could put you in a house or condo that would cost between $300,000 and $380,000 dollars. Certainly attainable in some of the more modest communities around me.
So the choice is to rent and pay your landlords mortgage or to put your housing expense to work for you by paying down your own mortgage and gaining the benefit of building equity in your own home and taking advantage of long term appreciation.
Forced Savings and Building Equity
Owning a home forces you to build equity in your home. Every month that goes buy you are putting more and more equity into your home. Very small amounts go towards equity in the beginning while as time goes on, more and more of your monthly mortgage payment goes towards the equity.
While there are certainly much better investments than buying a home from the aspect of getting a return on your money, your forced to build that equity by paying a monthly mortgage. And, really you would have to pay rent somewhere as I pointed out earlier.
Really who has an extra thousand or thousands of dollars to invest a month. Or even a few hundred for that matter.
So putting some of your housing expense towards forced saving will eventually get you a home that is mortgage free through building equity by paying down a home mortgage
When you rent you will never get one cent of your rent payment back. For any millennial paying rent maybe you should think of putting that monthly housing payment to work for you by paying down a monthly mortgage.
Appreciation of a Home
Another huge benefit of owning a home and helping to build wealth is home appreciation. When you look at owning a home over time, the base price usually goes up.
Typically a homes appreciation matches or outpaces inflation slightly. Roughly that is around 3% historically. Owning a home becomes a hedge against inflation.
Now house prices go up and down in short term cycles, but long term houses appreciate. So roughly a home purchase today at $300,000 will be worth $720,000 30 years from now, if history repeats itself.
Just time alone will help any millennial build wealth thru appreciation.
Tax Benefit of Owning a Home
Yes this is one often overlooked area of owning a home. Your interest on your mortgage and your property taxes are all tax deductible. In the first few years of owning a home your mortgage payment is mostly interest and that is all tax deductible!
So that 300,000 example I use below, you would have roughly a yearly interest payment of $12,480 and taxes of $4100. For a total of $16,580. How does that work. Say your taxable income was $100,000 you now subtract your interest and tax payment for an adjusted gross income of $84,420….
…saving you $4642 that year in taxes if you are in a 28% tax bracket. What could you do with an extra $4642 a year? Or if you look at the $12k individual standard deduction that is still $4,580 still saving you $1,282 a year.
So whats this mean?
Take a $300,000 condominium vs renting it for $1700 a month. After 3 years figuring mortgage payments, taxes, insurance, private mortgage insurance, maintenance and any cost of owning you will have been $10,000 ahead of the game by owning rather than renting the exact same home.
Now look at 10 years of ownership versus renting and you will now be $105,000 ahead by owning.
Look at the Baby Boomers and Gen X as they age and retire. The wealth that has been built in home ownership has created opportunities for these generations.
Many people of my parents generation bought their first house in the 60’s for around $10- 20,000 and moved up several times. They now have equity in those homes upward of a a half million dollars.
What about my clients who decide to downsize. They sell there large home they raised a family in and now decide to sell. They move into a smaller home freeing up equity in their home to help fund their retirement.
A Recap of the True Value for a Millennial to Own a Home
I covered a lot quickly here so lets recap in some quick bullet points.
- Forced Savings- Your mortgage remains the same for the life of the loan meanwhile rents slowly creep up. All the while your mortgage payments are paying down the balance.
- Tax Savings- There may be some tax benefits in the IRS code to owning a home. The very least is property taxes and mortgage interest are all tax deductible.
- Hedge Against Inflation- Your home will appreciate somewhat in pace with inflation. There is not another personal piece of property you can say that about with any great assurance.
- Live in Your Asset- You have to live somewhere so while you are paying a mortgage payment you are actually living in your asset. You have to live somewhere put that monthly housing expense to work for you.
- Building Wealth- All of these points add up to building wealth over a life time that will eventually be a help to you.
Will owning a home make you ultra rich… no. But it certainly can provide you financial benefits later on in life.
Quick Tips for the Millennial Home Buyer
Here are some thing you should know as a Millenial Home Buyer:
- Low Money Down- There are many low money down mortgage programs. You can put as little as 3% down on a home. A $400,000 requires as little as $12,000 as a down payment. It can be easier than you think to get your first home loan.
- Get the Seller to Pay Closing Costs– Discuss with your buyer’s agent and mortgage broker the possibility of getting the seller to pay some or all of your closing costs.
- Gift funds are now easier than ever to document. Don’t discount the possibility of a relative “gifting” you the down payment for your first house.
- Your first house doesn’t need to be perfect. You just need to start somewhere. The important piece is that time matters when building wealth with real estate.
So as a millennial don’t discount owning a home. Don’t wait for the perfect situation to occur or the perfect home… that will come. But start putting your money to work for you now. Time matters when it comes to building a wealth from owning a home.
As one last note, I implore the real estate industry to address ownership for the millennial and future generations. Make housing more affordable.
The Industry Needs to Change to Address the Millennial Home Buyer
In high cost areas lighten up and zoning… really who needs 2 or 1 acre zoning? And for the love of god, stop building huge houses.
Millennials want a nicely appointed homes, but they don’t need to be huge. Who is intrigued the most with the tiny house movement? Millenials!
Millennials also want home to be maintenance free. In general they prefer an urban area, which can provide social diversity and experiences. The uncertainty of growing up, going to college and trying to get a decent job in the last recession makes a millennial value experiences as they had to deal with so many financial uncertainties. The journey is more important than the destination.
Their values and lifestyle are different then past generations. The real estate industry needs to address the needs of the largest population of current and upcoming home buyers.
Other Millennial Home Buyer Resources:
- Anita Clark 10 Ways Millennials are Changing Real Estate
- Kyle Hiscock Its a Dog’s Life for Millenials
- Teresa Cowart Prepare Your Home for the Millennial Buyer
- Bill Gassett Top Tips for the Millennial Buying a Home
- Conor MacEvilly Is your Home and Asset or Liability?
The True Value of Owning a Home for Millennials is provided by Kevin Vitali of EXIT Group One Real Estate of Tewksbury MA. If you would like to sell your home give me a call at 978-360-0422 and let’s get the process started.
Real Estate Services in the following areas: Northeast Massachusetts, Merrimack Valley, North Shore and Metrowest. Including the following communities and the surrounding area- Amesbury, Andover, Billerica, Burlington, Chelmsford, Dracut, Groveland, Haverhill, Lowell, Melrose, Merrimac, Methuen, Middleton, North Andover, North Reading, Reading, Stoneham, Tewksbury, Tyngsborough, Wakefield, Wilmington, Westford