A number of national media outlets have recently presented new evidence that young people, especially Millennials, are not buying homes at the rate they used to. This is met with surprise by some observers who are not familiar with exactly how difficult the entry to adulthood has been for the most recent generation of college graduates. But it’s met with a knowing smile by those who are living it.
While there are a lot of factors that have played a role in limiting this latest generation’s financial prospects, the most important of these are the rising cost of college enrollment (with it’s attendant student loan crisis) and the recession that evaporated the types of job opportunities that were most hospitable to young people (entry-level career track jobs). Fortunately, not all hope is lost. Even with these trends, there are still ways to get back on track, which we’ll discuss below.
Why Most Millennials Can’t Buy Homes
For those who haven’t gone through the college application process in the last two decades, either as a student or as a parent, it might not be obvious just how big a deal the student loan crisis is. It’s one thing to hear people say they have thousands of dollars in student loans, but it’s another thing altogether to see just how much the cost of college has gone up compared to the rate of inflation and other goods:
College cost increases since 1985 (via Bloomberg)
When we see a graph like that, it brings home just how expensive college has become. But it still doesn’t even tell the whole story. Because the remaining question is: why were the costs able to rise like that? What allowed the price of college to become five times greater? The answer, in a word (or two), is “student loans.” During this same period of time, as the cost of college was increasing, so too was the reliance of students on loans – both from the federal government and from private lenders. Looking at a graph of student loan debt over the last 30 years shows the rest of the story:
Student loan growth (via The Atlantic)
While consumer debt has grown in recent years, it’s been nothing compared to the growth in student loan debt. And with total U.S. student loan debt sitting at about $1 trillion today, that is a lot of growth.
Unfortunately, someone has to be holding those loan repayment bills. And in this case, it’s the Millennials (not that they’re the only ones, of course).
With the average student loan burden approaching $30,000 per person, it’s no wonder that today’s young people are not buying homes like their predecessors. A recent graduate with a loan balance of $30,000 can expect a monthly required payment of at least $300 – and that’s assuming they will carry the loans for 10 years.
How can a person feel confident buying a home (and committing to the monthly mortgage payment) when he or she already has one monthly loan payment of hundreds of dollars?
The only way to feel confident about such a thing would be to have a stable, career-track job. If you felt secure in your job and in the likelihood of your continued employment, then you might be confident enough to take on a second monthly loan payment in addition to your student loan.
But unfortunately, that’s Problem #2. Job opportunities for recent graduates have dried up since the recession. With so many being laid off, the pain has trickled down to those with the least experience. Now they must compete against their elders for the jobs that in previous years would have been theirs for the taking. Where a plethora of entry-level work used to exist, there are now only hotly contested entry-level jobs that are usually filled by those with more experience.
A glance at unemployment rates by age group confirms that young people, especially those under 35, have it hard:
Unemployment by age group (via The Atlantic)
Even among those young people who are employed, things don’t always look sunny. Many of them are “underemployed,” working at jobs that either don’t utilize their college degree or that severely underpay them for their work, leaving them with little financial cushion to even consider buying a house.
This, then, is the big squeeze. Between unprecedented student loan payments and low-paying (or no paying) jobs, young people are getting crushed.
It’s a frustrating problem, with no easy solution. It may not get better anytime soon. And yet, there are some things that Millennials can keep in mind if they are hoping to one day enter the realm of homeownership.
What to Do if You Are Burdened by Student Loans and/or Unemployment
While some Millennials are rejecting the “dream” of homeownership altogether, others are still harboring hopes of buying their own place one day – if their personal financial situation and the broader economy look more favorable.
For those who are feeling stuck but who still would like to buy a house someday, here are a few tips and ideas to keep in mind and help you get there:
Manage student loans wisely. This could qualify as a “duh” statement, but in fact there are some programs and options that many are not aware of. For example, deferment, forbearance, or the Income-Based Repayment program can help those who are going through a rough patch. If you happen to work for a public or non-profit employer, you can qualify for Public Service Loan Forgiveness. Others may be able to qualify for refinancing. If you have more questions, take a look at our Student Loan Resource Center.
Unstick your career. While there are a lot of roadblocks to getting a career off the ground, there are also quite a few opportunities. It always depends on your field and your goals, but taking the extra step to talk to people who do the kind of work you want to do can be a great way to find out about opportunities that you might otherwise miss out on. For example, you can look for publicly advertised meetup groups or industry conferences for those workers. Show up there and start talking to people. Or do some searching online to find a potential mentor and reach out to them by email or phone. It might take a few tries, but building even one such relationship can be invaluable.
Don’t be in a hurry to buy. No matter what else is happening, it doesn’t make sense to buy a house if you are not ready. There is so much that goes with homeownership, from the mortgage payment to the insurance payments to the unexpected repairs, that you don’t want to jump in before you have the right financial foundation in place. It never hurts to consider the cost of renting versus buying.
Watch housing market trends. With the above in mind, once you do know that you’re ready to buy, then it’s time to start tracking the overall housing market trends, as well as the prices in your area. You don’t want to get caught buying during a bubble, as happened to many people in the 2000’s, so do your research before making a decision. In case you need a reminder, this graph from The Economist shows how volatile U.S. house prices have been over the last three decades:
U.S. house price changes (via The Economist)
Aspire to the house you need, no more. One of the things that happened during the recent housing bubble was that people were dreaming of houses that were more expensive than they could realistically afford. Compounding the problem, mortgage lenders often convinced people to spend more than would have been prudent, seeking to maximize the value of their loans. On the contrary, the best house for you is going to be one that lets you live comfortably without having to worry about excessive monthly payments that make you feel like you’re drowning. Passing up your “dream” house can be difficult, but finding one that’s a little less impressive – and much more affordable – could be the best decision you ever make.
Ultimately, we can hope that many of the trends hitting today’s young people will reverse themselves over time. The employment situation could improve, and perhaps new policy changes will make repayment of student loans a little easier for those millions who have them. In the meantime, hopefully the suggestions above will help you make sound decisions about your future.
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Image Credit: Tomas Laurinavicius