Millennial Homeownership Stalls as Flexibility Prevails

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Gary Alt, co-founder and financial advisor at Monterey Private Wealth in Pleasanton, CA, was quoted in a NerdWallet article, "Millennial Homeownership Stalls as Flexibility Prevails" by Tony Armstrong, published on April 29, 2015.

Click here to read the article at NerdWallet, or read it below.

Millennial Homeownership Stalls as Flexibility Prevails

Since 2009, the percentage of people under 35 who own homes has fallen from more than 40% to less than 35%, according to the U.S. Census Bureau. That’s the lowest rate among young adults since the Census Bureau started keeping tabs on homeownership by age group in 1982.

Soaring student debt and a relatively high jobless rate among millennials are some of the main factors pushing down their homeownership rates. Despite these obstacles, owning a home remains a pillar of financial security, one that young adults forgo by continuing to rent, missing out on the potential benefits of homeownership. Still, even some millennials who are earning steady salaries and not saddled with debt say buying a home simply isn’t in the cards.

“The biggest reason for me not wanting to buy, especially living in Chicago, is really just the price,” says Betsy Gregg, a 26-year-old public relations professional who doesn’t have any student debt. “It’s ridiculously expensive. It’s sort of unattainable.”

Renting offers flexibility, urban lifestyle

As well as not having the cash flow to accumulate a down payment, millennials like Gregg prefer a more mobile, urban lifestyle, which renting offers.

“If I wanted to buy a home, I’d have to move out of the city and into the suburbs, and that’s just not really what I want right now,” Gregg says. “I love the city. I love the freedom of being able to move every year if I wanted to.”

Kevin Mastaler, a 30-year-old investment manager in Delray Beach, Florida, echoes those sentiments. “I like the fact that I am not tied down to a residence and don’t have to worry about selling it if my career or life takes me in a different direction,” Mastaler says.

Owning a home can build wealth

Some financial experts argue that homeownership is a great way to build personal wealth, and that there aren’t many substitutes.

“Since you can buy a home with only a 5% down payment, that’s a lot of leverage to build wealth quickly,” says Gary Alt, a financial advisor in Pleasanton, California. “If you buy a $500,000 home with a 5% down payment, or $25,000, and its value increases to $550,000, you earned a 200% return on your invested capital.”

Alt adds that there really isn’t a proxy for homeownership.

“Without this traditional method for building wealth, millennials will need to consider alternatives,” says Carrie Houchins-Witt, a financial advisor in Coralville, Iowa.

As well as paying off current obligations and avoiding future debt, she recommends that young people spend less than they earn, and that they save and invest.

“There are no magic bullets here,” Houchins-Witt says. “Millennials need to develop a budget, spend less than they earn, and pay off their debts by paying off the most expensive debts first and contributing more than the minimum payment required by the creditor.”

Future of millennial homeownership

Mastaler says millennial homeownership will pick up, thanks to a gradually recovering economy, long-term interest rates that remain near historic lows and an increase in household formations.

“Because of the potential for higher interest rates on the horizon, I believe those that have been waiting on the sidelines will be more inclined to buy sooner than later,” he says. “Due to increasing rental rates, I believe the pendulum will swing the other way if rents continue to increase and will provide a tailwind for homeownership above a certain threshold.”

The largest group of recent homebuyers came from the millennial generation, according to a recent study by the National Association of Realtors. Partly, this is because millennials, or those ages 18-34, have become the largest age group in the country.

What’s more, optimism is high among young homebuyers, with 84% of millennials who buy saying their purchase was a “good financial investment,” according to the study.

This may be because many young buyers weren’t affected by the previous decade’s housing bubble, “so the optimism is there,” says Jessica Lautz, director of survey research and communications for the Realtors group.

“The other part of that is that interest rates are so low that they know they are getting a good deal,” Lautz says.

Not now, maybe later?

Although homeownership can provide a sense of stability and ballast, this move simply isn’t on the horizon for those young people who prefer to stay flexible and closer to high-cost downtown areas.

“It’s not even really on my mind,” Gregg says.

In the meantime, millennial renters with plans to buy a home at some point should save as much as they can and watch mortgage rates, as they may start rising in the not-too-distant future. Although sticking to a budget and setting money aside may not be as effective at building wealth as owning a home, those traits can serve as the first steps toward a stable financial future.

Tony Armstrong is a staff writer covering personal finance for NerdWallet. Follow him on Twitter @tonystrongarm and on Google+.