Millennials in about half of large metropolitan areas are underestimating how much they’ll need for a down payment on their first home and are not saving at a fast enough pace.
Bucking their rent-not-own reputation, millennials are looking forward to buying a home, but many have grossly underestimated just how much they’ll need for that all-important down payment.
Of the generation known for renting everything from designer handbags to desks in a shared office space, 79 percent say they want to purchase a home, according to a report published Wednesday by Apartment List, an online rental marketplace.
“A lot of folks said that millennials would go off and just rent,” said Jonathan Corr, chief executive of Ellie Mae, Inc. in Pleasanton, Calif. “But as they hit those life-event years in terms of getting married, having children, they’re starting to make that transition.”
That doesn’t mean they’re ready to sign a check. Millennials in about half of large metropolitan areas are underestimating how much they’ll need for a down payment on their first home and are not saving at a fast enough pace.
20 percent down
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In the San Francisco region, a 20 percent down payment on a median starter home (based on price data from Trulia) runs at about $142,800, more than double what respondents to Apartment List’s poll estimated.
Surveyed millennials reported current savings at $14,469, monthly savings of $360 and help from outside sources of $8,264, on average. At that pace, it’ll take them nearly 28 years to save enough money for a down payment, even though 37 percent of millennials said they’re planning to buy between three and five years from now.
That doesn’t factor in the possibility of an aspiring homeowner saving more money, perhaps thanks to a pay rise, but you get the picture.
“There’s a gap between expectations and the reality, and most millennials are not aware that there’s this gap,” said Andrew Woo, a data scientist at Apartment List in San Francisco. The company’s survey included around 12,000 millennials, defined as people between 18 and 34 years of age.
Looking at reasons for not buying a home sooner, 77 percent of millennials cited affordability as the biggest obstacle, compared with 38 percent who said they’re waiting to get married and 40 percent who said they’re not ready to settle down.
Prices rose in 81 percent of metro areas in the fourth quarter of 2015 from a year earlier, according to data from the National Association of Realtors. Competition is also weighing on access to starter homes. New inventory of such homes was down 17 percent in March from three years ago, according to data from brokerage Redfin.
The affordability issue is especially acute on the West Coast, which contains the most expensive real-estate markets, according to NAR data from the fourth quarter. Portland, San Diego, Seattle and Los Angeles are all in the top 10 of areas where millennials cite affordability as the biggest reason for waiting to buy a home.
“A lot of them might move to cities that are more affordable, either suburbs far from the core city or they might move from somewhere like California to Texas,” Woo said.
Smaller urban areas
The cities where affordability is a lesser concern include East Coast mainstays such as Atlanta and smaller urban areas like Charlotte, N.C., and San Antonio. Millennials in these cities are also much more prepared for homeownership. Apartment List estimates that young first-time buyers in Atlanta are just 3.2 years away from having enough money for a down payment.
Fortunately, young people looking to buy a home have more options available beyond the 20 percent down payment.
Last year, only about 18 percent of first-time buyers stuck to the old standard when purchasing their house, according to NAR data.
Millennials can pick from a variety of alternative financing solutions, including Federal Housing Administration loans, which allow borrowers to put down as little as 3.5 percent.
FHA loans accounted for 22 percent of all originations in March, according to data compiled by Ellie Mae. Many young people also receive help from family and friends. Twenty-seven percent of first-time buyers reported receiving such a cash gift in 2015, according to NAR data.