Gen Y Eyes Alternative Paths to the Dream of Homeownership
In the pursuit of the Hollywood dream at age 25, Shequeta Smith moved from North Carolina to Los Angeles in 2004. She rented a room from a friend and began visualizing a place to call her own. "I wrote down exactly what I wanted on a piece of paper, and I still have that paper," Smith told MainStreet.
The screenwriter and director imagined paying only $600 for a rental with a parking spot in Sherman Oaks, one of the wealthier enclaves in the sprawling city. But now a decade later she is looking to relocate to become a homeowner. Smith is one of the 48 percent of millennials who plan to move so they can own in the next five years, according to a study by The Demand Institute.
"Most millennials want to own a home," said Louise Keely, president of TDI and senior vice president with Nielsen (NLSN). "But those who are currently renting may have trouble saving money for a down payment, because apartment rents have increased more quickly than their income."
"It's hard to save money for a down payment, because of the cost of living," Smith said. "But once I make it in the film industry, I will buy a house outright in Charlotte and travel back and forth to Los Angeles for filmmaking."
The Dream of Homeownership with a Twist
TDI's "Millennials and Their Homes: Still Seeking the American Dream" found that the average millennial has $5,000 in debt and only $3,000 in savings outside of retirement. "Their net debt doesn't look like they are in a position to put a sizable down payment on a house, so saving money is an issue for millennials," Keely told MainStreet.
As a result, more millennials are looking to alternative approaches to home ownership, with 69 percent saying they'd consider lease-to-own as one way.
"Many are open to alternative approaches to housing finance, including single-family rentals and hybrid contracts such as lease-to-own," said Jeremy Burbank, vice president with TDI and Nielsen.
A Different Job Market
That's partly because the job market that millennials face differs from that of young adults in previous decades. "Unemployment is higher for millennials than older adults, which has slowed their household formation and their movement into homeownership," said Keely.
Although the study further found that 44 percent of millennials think it's hard to qualify for a mortgage, most millennials are undeterred about long-term aspirations to own a home. About 51 percent of college grads aged 30 to 34 with debt own homes, compared to 67 percent of college graduates with no debt. The national average of homeownership is 65 percent.
"The homeownership rate is lower for those who have student loan debt, but it's still higher than those who didn't go to college at all," said Keely. "Our findings indicate that student loan debt delays homeownership but does not cripple it."
One alternative to traditional home-buying is leasing-to-own, which locks a tenant in to the right to buy a home at a later date at a set price after putting down a non-refundable deposit. In some cases, part of the monthly rent goes toward the downpayment.
Other alternatives to a mortgage include single family rentals, shared equity and long-term leases. Types of shared equity include cooperatives, private sector subsidies and land trusts. "An example of shared equity homeownership is when a municipality owns the land and builds the house while the homeowner owns the structure but not the land," Keely said.
Long-term leases are another alternative to one- or two-year rentals by extending leases to 30 years, for example. "In the U.K., a leasehold is when you have a long-term lease as opposed to a freehold, where you own the property outright," said Keely. "With a long-term lease, the resident has the comfort of staying in the home a long time."
Gen Y Housing Boost
Despite their financial circumstances, the study found that millennials will spend $1.6 trillion on home purchases and $600 billion on rent in the next five years. "Millennials are an important factor in housing market activity," Keely said. "Their aspirations to own homes, move to the suburbs and drive a car are similar to [those of] older adults."
Because many are still single with no children, millennials also contribute to the economy in a unique way. "They move more often than older adults, which creates turnover," said Keely. "Moving contributes to the economy quite a bit. It's a trigger for other types of consumption, creating income and revenue for various industries."