Home ownership is often viewed as part of the American dream. Despite indications that millennials are shunning conventions, the house with the white picket fence continues to be a goal for many people. A 2016 survey by the Pew Research Center found 72 percent of renters would like to buy a house in the future.
"In America, the mindset is you almost feel ashamed if you tell someone you rent," says Kyle Winkfield, managing partner at finance firm O'Dell, Winkfield, Roseman and Shipp in the District of Columbia.
Financial planners say one appeal of home ownership is the opportunity to build equity – or value – in a property. "People need a place to stay," says Ash Exantus, director of financial education at BankMobile. Rather than pay rent for 30 years and have nothing to show for it, mortgage payments can end with a person owning something of value. "That money isn't being flushed down the toilet," Exantus says of how people view mortgage payments compared to rent payments.
However, having equity in a house, even a paid-off house, isn't the same as having cash in the bank. Before rushing to pay off your mortgage, Winkfield suggests considering whether it would be better to put extra money elsewhere instead of toward a mortgage balance. "I like having options," he says, and home equity limits options for the following five reasons.
1. Equity in a house isn't liquid. On paper, having $100,000 in home equity contributes to a person's net worth the same as having $100,000 in a bank account. However, in reality, there is a significant difference between the two. "Cash buys milk, eggs and health care," Winkfield says. "Equity doesn't."
Equity isn't liquid. In other words, it can't be easily converted to cash. Equity can only be accessed if someone takes out a loan against the value of their house or sells the property. "That's the major downfall as opposed to having money in a bank account," Exantus says.
The process of tapping into equity can take time, something you might not have in the event of an emergency. While you can set up home equity lines of credit in advance, those typically aren't guaranteed and can be revoked if the market takes a turn for the worse.
2. You need to ask permission to use equity. Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan, says it can be time-consuming to access equity, and it's also not a sure thing. "Let's say you have $200,000 of equity in your home," he says. "You have to go to the bank and ask for permission to get your own money back." Financial institutions are under no obligation to extend loans based on a property's equity, and they may require applicants to meet a list of requirements.
"If I need my money out of [a house], I need to be duly employed," Winkfield says. That could mean someone in need of cash because of unemployment or an extended illness won't be able to access their equity.
3. You pay interest on the money. Once a homeowner is approved for a home equity loan, interest will need to be paid. "You have to pay someone else an interest rate for your own asset," Foguth says. He uses the example of a $100,000 loan taken out at 4 percent interest. "Every year, it costs you $4,000 to have your own money."
Winkfield argues it's not even really your money if you have to pay to get it. "Interest is for the privilege of using someone else's money," he says.
4. Money in the market could earn more. Paying off a mortgage has long been a goal for many people, but there's no need to hurry in today's low-interest climate. "When your parents had a mortgage, their interest was double digits," Foguth says.
However, average mortgage rates have been below 5 percent since 2010. Meanwhile, the S&P 500 index on the stock market has averaged a 9.8 percent annualized return over the past 90 years. That means many people may come out ahead if they invest money rather than make extra mortgage payments.
"From an interest rate standpoint, the math doesn't make sense," Fogurth says about paying down a mortgage more quickly as opposed to investing money.
5. Housing prices can decline. Property has long been seen as a safe investment, and some people feel more comfortable having their money tied up in a house as opposed to in the stock market. Yet, as the 2008 recession demonstrates, property values don't always go up. "Putting your financial security in one sort of vehicle is a mistake," Exantus says.
Winkfield recommends that you focus on building wealth in bank and investment accounts. Ideally, you will accumulate enough to provide the peace of mind that comes from knowing you can pay off the house with cash at any time. It's not always wise to write a big check to pay off the mortgage. Instead, continue to make regular payments while allowing investments to grow. Eventually, "You'll have it paid off and have equity, but you'll also have money in the bank," Winkfield says.
Financial planners say they know why people want to pay off their mortgage. There is a sense of security that comes from living under a roof that doesn't have a loan attached. Still, there are property taxes to pay and natural disasters can always occur. Savings and investments don't come with those same costs or risks, which means that, in the end, equity might never be as good as cash in the bank.
The generation that's taken over homebuying
The Great Recession delayed many millennials from being able to buy a home, but the generation isn’t locked out of property ownership the way it was a few years ago. The National Association of Realtors defines the millennial generation as people born between 1980 and 1998, and according to the 2019 NAR Home Buyer and Seller Generational Trends report, they make up 37% of all homebuyers in the U.S., the largest share of any generation. Over the past five years as millennials have become a significant portion of U.S. homebuyers, they’ve also helped shape trends in location and home type preference, helped usher in technological advances and embraced new platforms that make a home purchase feel more user-friendly. Here are 10 ways millennials are changing the homebuying process.
Updated on Feb. 26, 2020: This story was published at an earlier date and has been updated with new information.Text communication is key.
Text communication is key.
The telephone was once the primary form of communication between real estate agents and their clients, but the younger generation that has grown up with internet and cellphones will likely prefer more text-based modes that make it easy to multitask. “A lot of my clients already work in tech, so their expectation is they’re going to work with an agent that can at least keep up with them in terms of communication,” says Dana Bull, a Realtor with Harborside Sotheby’s International Realty in Marblehead, Massachusetts, who specializes in working with homebuyers. She says millennial homebuyers prefer to text and email their agent more often than older generations, and it’s reasonable to expect they’ll be comfortable using real estate-related apps.Research is a natural part of the process.
Research is a natural part of the process.
When it comes to researching neighborhoods, checking out listings online and doing a deep dive into the fine print of a pending deal, millennial homebuyers are known for doing their homework. Jill Levin, a Realtor with Coldwell Banker Legacy in Albuquerque, New Mexico, says she recently represented some buyers in a deal that went particularly smoothly because the buyers read every disclosure and document sent to them and asked questions beforehand – something she doesn’t see from older buyers who feel experienced enough that they don’t need to read into the details. “There’s way more information today now, and (homebuyers) really, really should be paying attention,” Levin says.The hub for advice is online.
The hub for advice is online.
While apps and online search tools are an integral part of the homebuying process for all consumers these days, millennials are the first generation to grow up using technology broadly in everyday life. The familiarity with smartphones, social media and the internet make communication, finding out information and contacting professionals easier. Millennials are also inclined to shop around for everything from real estate agents to mortgages to contractors. In HomeAdvisor’s State of Home Spending report released in June 2019, the majority of millennials, Generation X and baby boomers research home remodel project costs on the internet, but millennials do so by the largest margin (77%).Homeownership is focused on building wealth.
Homeownership is focused on building wealth.
While purchasing a home involves plenty of hurdles for younger buyers, many of them are choosing to become homeowners because it helps them build wealth in the long term. “There is still interest in buying a house because I’ve got a job, I need a place to live, rent is expensive and I should put my money somewhere,” Bull says of the millennial homebuyer mindset. As they build equity in their home, they’re in a better place to purchase a larger house in the future or use the profit of a sale for other investments.Kid-friendly housing makes a comeback.
Kid-friendly housing makes a comeback.
Homeownership isn’t the only thing that millennials are doing later in life for financial reasons. Millennials are also marrying and having children later than previous generations. But as millennials get older, more are getting to the point where they’re starting families. While a condo in the heart of downtown worked for many first-time millennial homeowners when they were single, home preferences change as soon as kids come into the picture, Bull says: “People are starting to step up into that next level of a single-family home and maybe out in the suburbs.”Walkability is a must.
Walkability is a must.
Even with many millennials leaving urban centers, one feature they won’t compromise on is walkability. “They want more activities in the area, they want walkability, they want the convenience of shopping without having to use their cars a lot,” Levin says. Even in more suburban settings, many millennials are showing a preference for areas that offer residential and commercial spaces within walking distance. Bull says the areas catering to these homebuyer preferences have been dubbed “hipsturbia,” where suburban towns offer an active downtown or main street area with the live-work-play atmosphere many people don’t want to lose when they move out of a major city center.Eyes are on garages and kitchens.
Eyes are on garages and kitchens.
Luxurious features and finishes in a house are ideal, but millennial homebuyers are making their must-have lists a bit more realistic. In a survey of 1,000 Americans who plan to purchase a home in 2020 by real estate information company Clever, millennials' preferred home features focused on details that make life more convenient, especially as they start families. When asked which features are a requirement for their new home, millennial respondents placed a garage, large kitchen and space to grow into as their top three priorities. Details like hardwood flooring, a fireplace, pool and dedicated office space were among the lesser-desired details.High home prices don't deter eager buyers.
High home prices don't deter eager buyers.
Affordability is still an issue for many millennials, especially among the younger members of the generation. But that doesn’t mean millennials are uninterested or afraid of purchasing a home – it’s just a matter of the right timing, the right location and the right home. Between consistently rising home prices and a lack of inventory as homeowners choose to remain in their homes longer, the housing market remains extremely competitive, Bull says, especially in the Boston area where she works. But the millennials who are financially ready to purchase are willing to rise to the challenge. “They’re used to being aggressive to get into the college they want, and then get the job they want,” Bull says, which primes them to make a strong offer if they see a home they like.Low down payments solve savings issues.
Low down payments solve savings issues.
The Clever survey found 70% of millennial homebuyers plan to make a down payment of less than 20%. Low down payment programs have grown significantly in the past 10 years and are now a major part of home purchases – NAR’s 2019 Profile of Home Buyers and Sellers reports that the median down payment for a home in the U.S. is 12% of the purchase price. While low down payment programs help resolve the lack of savings, homebuyers putting less than 20% down should be sure to factor into their budget the added monthly cost of private mortgage insurance.Parents play an important role.
Parents play an important role.
For younger millennials and even Generation Z, which is made up of people born in 1999 and later, coming up with the cash for a down payment is one of the biggest obstacles to becoming a homeowner, even at less than 20% of the purchase price. For millennial first-time homebuyers and the rare Gen Zer getting into the market, financial help from a loved one is often what makes a home purchase possible. “Parents are getting involved a lot – I still see a lot of situations where parents are gifting money or helping in some other way,” Bull says. “I don’t see that changing at all.”Here are 10 ways millennials are changing homebuying:
Here are 10 ways millennials are changing homebuying:
- Text communication is key.
- Research is a natural part of the process.
- The hub for advice is online.
- Homeownership is focused on building wealth.
- Kid-friendly housing makes a comeback.
- Walkability is a must.
- Eyes are on garages and kitchens.
- High home prices don't deter eager buyers.
- Low down payments solve savings issues.
- Parents play an important role.
With more than a decade of reporting experience, Ms. LaPonsie’s work has been featured on MSN, CBS MoneyWatch, Yahoo Finance, NerdWallet and numerous other sites on the web. She has been a guest of Consumer Talk with Michael Finney and The Steve Pomeranz Show.
A native of Michigan, Ms. LaPonsie received her bachelor’s degree from Western Michigan University. You can follow her on Twitter or connect with her on LinkedIn.