Photo: Flickr user Dan Moyle

Mortgage rates remain near all-time lows, job prospects are getting better for educated individuals, and ever-increasing rent make buying a house a financially practical choice. So, why is the homeownership rate at its lowest level in 48 years despite these compelling reasons to buy?

US Home Ownership Rate Chart

The first-time buyer segment can make or break the housing market
Just 63.4% of U.S. households own their homes, down from a peak of 69.2% in 2004. During the past year, 123,000 new homeowner-based households were created, a stark contrast to the 1.3 million renter-based households that have formed.

One of the biggest reasons for the low homeownership rate is the lack of first-time homebuyers in the market. In fact, the most recent data shows that only 32% of 2015 purchase transactions come from first-timers, the lowest level in nearly 30 years.

As I mentioned in the introduction, the homeownership rate is down by 5.8% from its peak level. First-time buyers historically make up about 40% of the market, so if the current 32% rate returned to its normal level, it could potentially transform a generationally low homeownership rate into an all-time high. In a real sense, first-timers can make or break the U.S. housing market.

Some reasons for not buying are legit...
Why aren't first-time buyers coming into the market as much as in previous years? There are several possible reasons that could prevent millennials from buying homes, and some are valid. Just to name a few...

  • Growing up slower -- Younger people are waiting longer than ever to get married and start families, and therefore are waiting longer to buy. In fact, Zillow found that the average renter waits six years before buying a home -- up dramatically from 2.6 years in the early 1970's.
  • Inventory is low -- It's true that the inventory of available homes has dwindled in many markets over the past several years. The crisis-era foreclosures have largely disappeared from the market, many homeowners are still "underwater" on their mortgages and are unable to sell, and others believe their homes will continue to rise in value over the coming years, and are reluctant to put their homes on the market.
  • High competition -- There are more investors in the market than in previous years. In fact, one in four purchase transactions today are all-cash, and a large portion of these are in the lower price ranges that first-timers can afford. As a result, younger buyers who depend on mortgages are finding it difficult to compete with cash buyers for the most desirable homes.
  • Careers are less "stable" -- Changing jobs every few years has become the norm, and as a result, younger people are more reluctant to settle down. We've written before that homeownership is generally a bad idea unless you plan to stay in the house for at least five years, and this is a legitimate reason to shy away from buying.
  • Too much debt -- If you read the news at all, you know that student loan debt is at an all-time high, currently averaging more than $35,000 for borrowers graduating in 2015. With high debt levels, a mortgage can be more difficult to obtain, so many prospective buyers are waiting until their debt load becomes more manageable.
  • Many simply don't want to own a house -- Finally, after watching their parents' homes plummet in value (and possibly get foreclosed upon) during the financial crisis, owning a home is simply less appealing to many younger people. Owning a house is certainly more complicated than renting, with maintenance issues, property taxes, insurance, and other considerations, and many millennials understandably want to keep their housing situation simple and predictable.

...but others are just excuses
Now, I'm admittedly biased here -- I've been a homeowner for years and couldn't imagine it any other way. Still, a few of the reasons given by would-be first time homebuyers shouldn't stand in the way. Here are four of the most common:

1. Home prices are too high -- At first glance, this appears to be a real issue. After all, when adjusted for inflation, the average first-time home price has increased by about $40,000 since 1990, according to Zillow. Meanwhile, wages have barely budged during that time, up by just $2,000.

So, it may seem like buying a home has become less affordable over the past few decades. However, keep in mind that the average 30-year mortgage rate in 1990 was close to 10%, more than double today's widely available 4% rates. When factoring in this difference, the average mortgage payment on a first-time home purchase is actually less than it was back then when accounting for inflation.

2. It's tough to get a mortgage -- This is a common reason cited, and a few years ago it was true. However, as the financial crisis gets further behind us, mortgages have gotten easier to come by. A conventional loan can be obtained with a credit score as low as 620, and an FHA loan requires just a 580, or less if you have more money to put down. Other than the credit score, all you'll need is an acceptable level of other debts and a solid employment history.

3. I can't afford the down payment -- Admittedly, several factors have made it difficult for young people to save money for a down payment. I've already mentioned the increased student loan debt. Plus, rent is rising much more rapidly than wages -- in fact, the cost of rental housing has increased 20% in the past five years.

However, the little-known fact is that you don't need much of a down payment to buy a home. Conventional mortgages (not through the FHA) can be obtained with as little as 3% down, even without a stellar credit score. Other loan programs, such as VA loans and USDA rural mortgages can be obtained with no down payment at all. Some individual banks, such as Regions, offer special loan programs -- such as 100% financing to borrowers with strong credit.

The point is that there are plenty of options for people who want to buy homes but don't have massive piles of cash to put down.

4. The housing market could crash again -- While home prices could definitely go down, a full-blown crash like we saw a few years ago is unlikely. All of the issues that created the housing bubble have been dealt with, and the market is much healthier than it was. Until you see NINJA (no income, job, or assets) loans, 120% LTV cash-out refinance mortgages, and other exotic loan products make a comeback, there is little chance of another crash.

Shouldn't more millennials buy homes?
There are several valid reasons for not buying a home, including an unstable career or family situation and a general lack of desire to be stuck in one place. However, since millions of millennials want to become homeowners, home prices, down payments, and the perceived difficult mortgage market shouldn't stand in the way.