For as long as I can recall, the American Dream, defined as the ability of every U.S. citizen to achieve success and prosperity through hard work and determination, has involved the pursuit of homeownership. Owning your own home has often been viewed as a sign of financial success, and quite a few families use the equity built in a primary residence over time to help fund retirement.
But the American Dream isn't the same for millennials as it was for their parents. The pursuit of homeownership in America is waning: Since the first quarter of 2009, homeownership rates for those under the age of 35 have fallen from 39.8% to 34.2% in the first-quarter of 2016, according to U.S. Census Bureau data via USA Today.
And data released a week ago by real estate database company Zillow points to an even more frightening picture that could doom homeownership rates in America.
According to Zillow's latest report, just 14% of current renters could likely afford their area's median-priced home. Almost half of all survey-takers noted that they were already spending at least 30% of the pre-tax income on rent, making it potentially difficult to qualify for financing on a home.
This analysis comes at a time when homeownership in the United States is down to 63.4%, a 48-year low, and a steady decline from the 69% homeownership rate hit 12 years ago. At the same time, we're also witnessing a near-40-year low in vacancy rates for rentals. Since 1995, monthly median asking rent for vacant units has doubled from about $425 to $850.
Here's why homeownership rates are plunging
What's caused this precipitous decline in homeownership among millennials and Americans as a whole?
Part of the blame rests with weaker-than-expected wage growth. Nominal wages in the U.S. rose by 727% between 1964 and 2014 based on data from the Bureau of Labor Statistics via the Pew Research Center. However, inflation-adjusted real-wage growth in constant 2014 dollars grew only 7% over the same time span. In the meantime, numerous other costs have outpaced wage growth, such as medical costs, college tuition costs, and even, in some markets, home prices and rental inflation. Without real income growth, individuals and families are struggling to gather the income needed to afford homes.
Secondly, as Zillow's report points out, there are still quite a few people with subpar credit scores, which could keep them from getting loans, or even credit cards for that matter. Data from ValuePenguin, a website devoted to aiding consumers in making smart consumer spending decisions, shows that the average credit score in the U.S. in 2015 was 695, up modestly from 687 in 2009 and 2010. The credit score scale ranges from a low of 300 to a high of 850, with prime candidates being 680 and above, near-prime candidates hovering in the 620-680 range, and subprime candidates having a score under 620. As of 2014, just 48.9% of all Americans had prime credit scores, leaving the remainder of adults questionable when it comes to being able to secure home loans. It's also worth pointing out that people aged 39 and under had nearly a 40% chance of a subprime credit score, compared to just 16% and 8% for those ages 60 to 69 and 70+, respectively.
Lastly, Americans are poor savers, and that's a problem when lenders typically require a sizable down payment in order to purchase a home. The June 2016 personal savings rate was just 5.3%, a far cry from what the citizens of other developed countries are socking away in savings. Furthermore, a GOBankingRates survey from March 2016 showed that 56% of Americans have less than $10,000 saved for retirement, including 33% with $0. For millennials, 42.2% had zilch in retirement savings, and another 29.8% had less than $10,000. That's 72% of the millennial population with very little in savings, which can make it very difficult to purchase a home.
Paving the path to homeownership
The biggest problems for millennials are a lack of wage growth, poor credit scores, and insufficient savings. Thus, the easiest way to homeownership is to tackle these problems head-on.
1. Strongly consider college
First of all, millennials should strongly consider working in job fields that have strong long-term demand, as well as go to college to obtain at least a bachelor's degree. The debate over whether or not college is worth the cost is probably going to continue for as long as we live -- but data from Pew Research suggests it's definitely worth it.
Millennials between the ages of 25 to 32 with a high school diploma earned a median of $28,000 in 2012 dollars according to Pew. By comparison, same-age millennials with at least a four-year bachelor's degree or higher earned a median of $45,500 per year in 2012 dollars. That can be a huge difference over one's lifetime.
Also, the individual with a degree would presumably have a better chance at business advancement over an individual without a degree, providing more opportunity for socioeconomic advancement. The key is in finding a college that gives you the best return on investment. College tuition price isn't necessarily indicative of return, so make sure you do your homework on colleges that fit your major of choice.
2. Maintain a good credit score
Secondly, millennials (and really all Americans for that matter) need to understand that their credit scores are important, so they should strive to improve them as much as possible. Remember, credit scores don't just affect whether or not you can obtain a loan or help set your lending rate. They can also affect your ability to rent, as well as get a job, since landlords and employers can check your credit score.
The most obvious way to positively impact your credit score is to pay your bills on time. Payment history counts as approximately 35% of your credit score, and there's really no excuse for missing your credit card due date. It may be in your best interest to set up an automatic payment plan with monthly bills, such as utilities or your wireless phone plan, to ensure you're never late.
You should also pay close attention to how you use your credit, with credit utilization comprising about 30% of your FICO score. Maxing out your credit cards, or getting anywhere near your credit limits, makes you look like a risk to lenders. Generally speaking, credit reporting agencies like to see consumers use 20% or less of their credit access line. Additionally, showing that you can be responsible for multiple types of credit, such as a department store card, mortgage, and car loan, can go a long way to building a prime credit score.
3. Keep a detailed monthly budget
Lastly, it's pretty clear that millennials need to be working with a household budget more often based on their low savings rates. Without a budget, millennials will likely struggle to understand their incoming and outgoing cash flows; and without this understanding it's impossible to optimally save money for a home, or retirement for that matter.
The good news is that budgeting tools can be found in abundance online. In a matter of 30 minutes you can have a working budget and plan in place to get your financial goals on track. The biggest challenge will be sticking to your plan. This is where surrounding yourself with like-minded people is important. Your chances of sticking to your budget improve if everyone in the household is abiding by a budget. If you live by yourself, meeting up with a group of like-minded people your age at a coffee shop can help keep you on track, as well as provide a chorus to bounce saving and investing ideas off of.
It may also be worthwhile to have budgeted funds in a separate account from your checking account, as the temptation to pull money out when you know it's available may be too great.
Lastly, consider setting up an automatic weekly, bi-weekly, or monthly withdrawal from your checking or savings account to hold yourself accountable for your spending habits.
Follow these steps, and your path to homeownership could get a lot easier.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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