Author: Suraj Sunkara
The BRB Bottomline: Widely considered the cornerstone for the American dream, homeownership rates are dropping rapidly among young adults. Continue reading to learn why this matters to you…
Young adult homeownership rates are falling rapidly. What used to be the staple of the American dream, the most notable milestone towards true adulthood, has become a pipe dream for many, as millions of millennials flock to rent.
Why Rates Are Dropping
From 1960 to 2017, the percentage of young adults who owned homes dropped 10%, demonstrating a shift from ownership to renting. This shift isn’t voluntary; more than two-thirds of renters reported a lack of financial resources as the primary reason for not buying a home. Tighter lending standards have made buying homes more difficult compared to 1960. A third of young adults don’t meet the minimum credit score of 620 to obtain loans backed by Fannie Mae. Furthermore, the average credit score of people getting mortgages backed by Fannie Mae is around 750, higher than the credit score of most young adults. On top of that, many young adults are burdened with student loans and increasing rent, dwindling savings for future homeownership.
Why it Matters
Does early homeownership even matter in the first place? Studies show they do. Although homeownership isn’t essential for financial prosperity, delayed homeownership reduces the total wealth one generates over their lifetime. Individuals who bought their homes between the ages of 25-34 have the greatest housing wealth by their sixties, and those who bought their homes before 25 have the greatest return on housing investment.
The benefits of early homeownership are visible both in the chart above and in the statistics mentioned earlier. As older/retired people rely more on their accumulated wealth than their income, the impacts of early homeownership grow greatly over time. Just to add icing to the cake, homeownership protects residents from rising rent prices and provides greater psychological health and stability.
Financing Your Home
Many of you probably already know the benefits of buying a home. Maybe you want to buy a home, but simply don’t know how to get the money to do so. While I won’t provide an all-comprehensive list of options, I do want to mention a few choices outside the traditional bank mortgage route. There has been a recent emergence of startups and companies that want to help you buy your dream home. One such startup, ZeroDown, wants to help buyers who can’t afford the expensive down payments in large metropolitan areas like the Bay Area and Greater Austin. ZeroDown will buy your dream house and then rent it out to you until you’re ready to purchase. Instead of the usual ~20% down payment, you’ll only have to pay their one-time $3000 starter cost. Furthermore, you don’t have to worry about interest rates or principal because you’re essentially just leasing a home with an option to buy. An alternative similar to ZeroDown is Divvy, which also purchases your dream house and rents it out to you. On top of this, a portion of your monthly lease payments contributes to your ownership of your home. You can either use this saved up ownership to buy the home at a lower price or opt to walk away and cash out on that ownership. Although many of Divvy’s customers still apply for a mortgage when finally purchasing their home, their service buys customers enough time to get their finances in order
Don’t take my words as a be-all-end-all. Sometimes early homeownership may not work for your lifestyle. If you are living in an urban center or you are moving around a lot, buying a home isn’t feasible. Furthermore, as many young adults have moved back home due to the coronavirus pandemic, homeownership might not even be on your wishlist. Overall, although young homeownership does have its benefits, individual circumstances must be evaluated before making such a huge decision.
Suraj is a junior at UC Berkeley majoring in Economics with a minor in Data Science. He is excited to help BRB educate readers on different financial/economic topics relevant to their daily lives. Outside of BRB, he is involved in the Berkeley Investment Group and UC Berkeley Zahanat, a bollywood fusion dance team. In his free time, you can find him jamming out to K-Pop, watching the Pittsburgh Steeelers, or playing League of Legends/Teamfight Tactics.