Millennials buy homes cautiously, trying to spend less on housing

Tired of squandering more than $2,500 a month on rent in downtown Washington, D.C., Tyler Hanson, 30, finally decided to buy a place for herself and her 4-year-old daughter.

But she had a non-negotiable rule: One of her biweekly paychecks had to cover all her fixed monthly bills, including mortgage, utilities and student loan payment. It took Hanson about 18 months to find a $340,000 row house that met her benchmark, and it was far from her preferred neighborhood.

But Hanson has no regrets that she stuck to her guns even though she was qualified by her lender for a home costing up to $430,000.

“This is the largest purchase I’ve ever made,” says Hanson, a lobbyist. “I want to make sure I’m very comfortable financially.”

Millennials have been driving home sales the past few years, but they’re doing so cautiously. About 76% of 22- to 38-year-old recent homebuyers spent less than 30% of their monthly income on housing costs in 2017, the latest data available show. That’s up from 69% in 2000 and 65% in 2009, according to Census Bureau figures.

“I don’t want to have all my money go to a mortgage so that I can’t travel or have a drink or have fun,” says Hanson, who visited dozens of homes during her house hunt and was routinely outbid since she wouldn’t go more than a few thousand dollars above asking price.

Hanson was also frugal about her down payment, plunking down 3% of the purchase price.

Many young households “learned a lesson” from the drop in home prices a decade ago, says Doug Duncan, chief economist of Fannie Mae. “They’re being conservative.”

Experts have long advised homebuyers not to spend more than 30% of monthly income on housing to avoid straining their wallets. Devoting too much income to housing costs also can make it difficult to continue making house payments in case of a job loss or unforeseen medical expense.

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The share of frugal young homebuyers staying under the 30% income-to-housing costs threshold was just 54% during the tail end of the housing boom in 2006 and has climbed steadily since. It has been roughly flat at about 75% since 2013. That’s despite a strengthening labor market and faster wage growth, and lending standards that increasingly eased starting in 2014 before leveling off the past couple of years.

A closer look shows millennials are being particularly prudent. The median income-to-housing cost ratio for 23- to 37-year-old homeowners has dropped from 18% in 2002 to 15.8% in 2017, the largest decrease among age groups from 18 to 62, according to Trulia, a real estate research firm.

Rick Morrison, a Redfin broker who represented Hanson, estimates that about half his millennial house-hunting clients set very conservative price ceilings and won’t exceed them even if they constrain their ability to find a suitable home. About 3 in 10, he estimates, give up without making a purchase.

Besides guarding against a potential slide in prices, there are other reasons millennials are being thrifty about home purchases:

Experiences over things

Young people value other things, like experiences, above owning a home. More Americans in their 20s and 30s (56% to 79%) cited good health, financial security, leisure time and a happy marriage than home ownership (56% to 61%) as factors contributing to a good life, according to a 2017 survey by market research firm Gfk Global.

Student debt burdens

Other expenses, especially student loan debt, are making young adults reluctant to spend too much on housing, says Danielle Hale, chief economist of realtor.com, a website of real estate listings and tools. Student debt has hit a record $1.5 trillion, with millennials on the hook for much of that tab.

“Student loan (bills) are out of control,” says Hanson, who has about $180,000 in college and law school debt that’s costing her several hundred dollars a month.

Job hopping

With unemployment at a 50-year low and job openings near a record high, millennials are increasingly hopping from one job to the next, often with lags of weeks or months in between, says Daryl Fairweather, chief economist of Redfin. As a result, she says, they want to build enough savings to tide them over, a goal that becomes less feasible if their mortgages eat up their income.

Diversifying investments

Just 48% of older millennials and Gen Xers believe real estate is a better long-term investment than the stock market, according to a survey commissioned by Redfin in December.

“They don’t want to put all their eggs in one basket,” Fairweather says.

Hanson, for example, says she wants to save up so her daughter can go to college. 

Duncan says millennials’ prudent approach is generally healthy. At the same time, young adults who refuse to budge even slightly from their price or monthly spending limits “might miss some opportunities to build wealth” through housing, he says.

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Prices for entry-level homes – the category typically targeted by millennials – have jumped an average 8% a year since 2012, compared with 6.4% and 5% increases for mid- and high-priced homes, respectively, according to Trulia. That means millennials often may need to bid up to buy a house. 

Hale agrees, adding that millennials should be aware of the trade-offs they’re making by remaining renters: Their rents will continue to rise, while payments on 30-year mortgages are fixed.

And Fairweather notes young adults almost certainly will continue to get raises, lowering the share of income they devote to house payments over time.

For Hanson, the calculus was simple. Her landlord was about to hike her monthly rent by several hundred dollars. Now, she’s paying significantly less for a home that needs some work but is about 1,100 square feet, compared to her 700-square-foot luxury apartment.

“I’ve been paying crazy rent every single month,” she says. “I didn’t want my mortgage to be sucking everything out of me.”