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Home ownership is a dream deferred for the millennial generation.

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Millennials want to buy homes but they cannot for three reasons.

“The perception is that millennials are the generation that would rather have the latest smartphone than a new car, so it stands to reason: Why would they want to own a home?” Yilan Xu said. “It doesn’t seem like they would want to. But it turns out that millennials still do eventually want to own a home. They just face significant obstacles in doing so.”

In the paper, Xu and her co-authors examined the factors that affect housing demand of the millennial generation. They draw three conclusions:

  • Mortgage accessibility is a key constraint to homeownership for millennials.
  • The burden of student loan debt among millennials impedes their transition from renters to homeowners.
  • Millennials are taking a longer time to settle down, so family events related to home purchases – such as marriage and having children – are being pushed back.

“All of those factors indicate that the American dream of homeownership is not dead – it’s just deferred,” Xu said.

As a result of the Great Recession, millennials who were underemployed may not have enough money for the initial down payment necessary for a mortgage. Or they may have a low credit rating, which often translates into a higher interest rate on a home loan or completely disqualifies them as a borrower, Xu said.

“Economic downturns are a great time to buy real estate, but millennials did not have the chance to take advantage of that opportunity,” she said. “They were trapped in a cycle of student loan debt payments and underemployment. So they were and continue to be at a disadvantage in that regard.”

With millennials getting married and having children later in life, there’s also no incentive for them to move from a bachelor pad to the suburbs.

“Millennials consider their homebuying decisions along with their family decisions,” Xu said. “We don’t have real good data on millennials, but the trend is that millennials are getting married and having children later in life; therefore, there’s no real urgency for them to own a home.”

But the biggest factor impeding their transition to homeownership is student loan debt, Xu said.

“Student loans are the biggest problem for this generation, potentially disqualifying millennials for mortgage loans due to low credit scores and high debt ratios,” Xu said. “It is estimated that millennial student-loan debtors have to spend about half of their monthly income to make debt payments, but if they wish to finance a home while they are paying the student loan debt, the high debt-to-income ratio effectively disqualifies them for almost all mortgage loans. Even among those millennials who are doing well financially, just a general aversion to debt is also discouraging them from taking out a mortgage.”

The silver lining: Student-loan holders are more likely to simply delay buying a home rather than giving up on homeownership altogether.

“Student loans are a factor, but it only has a temporary effect,” Xu said. “They’re probably just going to postpone homeownership rather than rent for the rest of their lives. So it’s a dream deferred further into the future. But what’s not clear is just how much further millennials will postpone homeownership.”

It’s a finding that should give policymakers pause, since homeownership is associated with a number of good outcomes, Xu said.

“Prior research indicates that homeownership carries numerous benefits,” she said. “The children of homeowners typically perform better in school than those of renters, for example, and homeownership reduces the risk of divorce among couples. So there are a lot of benefits. It’s definitely a policy target that should be promoted, which is why policymakers should worry.”

Top Reddit comment:

She doesn't mention the number 1 reason I haven't bought a home; the income to house price ratio getting out of control. Here's an article which talks about this issue in the GTA. (Where I'm from). Although the minimum down payment has gone down in terms of percentage, it hasn't dropped much in terms of the dollar value as the housing prices are so much more expensive. So to get 5% down you are saving an amount which relates closer to what would have been 20%. Additionally the size of the mortgage you will need is insane. I and many others like me are just not comfortable putting ourselves into Massive debt for the majority of our lives in order to buy a house which is effectively 14 times the worth of our before tax annual income.

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