If you're a millennial dreaming of buying your first home, you're not alone.
Only about half of millennials, the generation born between 1981 and 1996, are now homeowners, and their rate of homeownership trails behind those of Generation X, Baby Boomers, and the Silent Generation. In fact, the rate of homeownership has declined for each succeeding generation, according to a report by Apartment List, and many of the millennials that have been able to do so have had help from family.
It's also no secret that millennials are at a financial disadvantage compared to earlier generations. Millennials came of age during the great financial crisis, and are also facing higher student loan burdens than any earlier generation.
In the U.S., the home-price-to-median-household-income ratio, a popular measure of home affordability, recently peaked at close to 8, even higher than it was at the peak of the housing bubble. Historically, that ratio has been around five times annual household income, which is a significant difference -- more than a third lower than the current ratio at 7.58.
From 1960 to 2000, the home-price-to-median-household-income ratio was below 5. Interest rates were generally higher back then, but even the recent interest rate hikes have done little to bring home prices back within their historical norms, relative to income. Higher interest rates also make buying a home even harder for millennials, who have less cash saved up than older generations, since higher rates make monthly payments significantly more expensive.
So how will millennials ever be able to afford homes? Here are a few tips for aspiring young homeowners.
Image source: Getty Images.
1. Take advantage of remote work
Not every job can go remote. If you're a teacher or a nurse, you're mostly out of luck. But if you do have a career where you can work remotely, you might want to consider moving to a more affordable housing market, especially if you're living in an expensive market on one of the coasts. You'll likely find that housing is much cheaper in the Midwest or South, including fast-growing markets in places like Texas and Florida.
In Chicago, for example, the median listing price is just $350,000, and in Philadelphia the average home is just $250,000. Those are two of the biggest metro areas in the country.
Moving to a new place is a difficult decision, but if homeownership is a priority for you, it may be worth considering, especially if there's a more affordable market nearby.
With remote work becoming the norm in the corporate world, you have an opportunity that previous generations did not, and can take advantage of arbitrage opportunities by earning remotely but paying locally.
2. Know your financing options
If you think you need to take out a 30-year fixed mortgage and put 20% down in order to buy a home, guess again.
According to Rocket Companies, the average down payment for a first-time buyer is just 6%, while it's 13% for repeat buyers.
For conventional loans, you must put down at least 3%, but you may also be eligible for other types of loans. If you've served in the military, you can get a VA loan with no money down, and a USDA loan is available for purchases in qualified rural and suburban areas.
If you don't have good credit or finances, you may also be able to get a Federal Housing Administration (FHA) loan with at least 3.5% down.
You should also be aware that you don't have to use a fixed-rate mortgage. Now could be a great time to consider an adjustable-rate mortgage (ARM) since interest rates have gone up and the Federal Reserve expects them to come down in the next few years.
You might want to look at a 5/1 ARM, which means you pay a fixed rate for five years and then the rate floats according to a benchmark index. A 5/1 ARM currently offers a rate more than a full percentage point lower than the 30-year-fixed, and the floating rate is likely to be lower in five years if the Fed's forecast is correct.
You can also refinance your mortgage to a fixed rate when the ARM floats if you prefer that.
3. Have a strategy
If you're struggling to afford to buy your own home, it may be a good idea to tighten your focus and make a plan.
Is there a specific pain point you're facing? Is your credit score too low? Do you have too much credit card debt or student loans? Commit to paying off your debt and improving your credit score.
Alternatively, if you need to save for a down payment, consider cutting back on spending in order to sock away some money every paycheck.
If you need more income, this could be a good time to negotiate a higher salary or seek better employment elsewhere, especially while the labor market is still tight in a number of industries.
Finally, if the housing market you're in is exorbitantly priced, the best move may be to seek greener pastures.
While millennials are at a disadvantage compared to previous generations, homeownership can be the best wealth-building tool available, so it's worth sacrificing for. Start with some of the steps above and you may find that owning a home could be within reach sooner than you thought.
