James Benn

Millennials Carry Historically High Student Debt Levels

Much attention has been paid to skyrocketing college costs, with many positing that the resultant accumulation of unprecedented student loan debt—now totaling more than $1 trillion—makes homeownership unaffordable for millennials.

This generation carries more college debt than the ones before. Data from the Federal Reserve Bank of New York shows the share of 25-year-olds with student debt increased from 25 percent in 2003 to 43 percent in 2012, and their average balance nearly doubled. According to The Project on Student Debt, 2008 graduates from nonprofit four-year colleges had an average of around $24,600 in student loans. Compare that with the average debt of approximately $15,000 (adjusted for inflation) for Gen X’s 1993 graduates.

For many, the weight of student debt impacts buying choices: In a 2012 Rutgers University survey of recent graduates, 40 percent of respondents cited student loan debt as a reason they’ve delayed major purchases like a home. Historically, while student loan debt can be an impediment, it has not been a showstopper.

“Record-high student loan debt makes it very hard to save,” says Zillow senior economist Skylar Olsen. “We’re seeing more and more FHA loans, more down payments under 20 percent.” Because mortgage rates remain low, payments remain affordable even after private mortgage insurance is included, she adds.

That affordable mortgage payment could be a major demand driver as rents continue to increase, especially for those who are dedicating large portions of their monthly budget to student loan repayment. “When you crunch the numbers, it will be a better economic decision to buy as opposed to rent,” Olsen says.


Millennials Can’t Afford Down Payment at Today’s Standards

It’s hard for millennials to save money. In fact, most are mired in debt with an average savings rate of -2 percent, according to Moody’s Analytics. However, according to Moody’s chief economist Mark Zandi, they’re not behaving any differently than the generations before them.

“If anything, they’ve actually saved more. Their saving rate has been higher; probably in terms of dollars they have not saved as much just because their incomes have been lower in the tough economy, but I don’t know that they’re behaving any differently,” he says.

Most millennials were just entering the job market during the recession, with an unemployment rate for recent graduates with a bachelor’s or advanced degree aged 20 to 29 hitting 17.6 percent in 2009, according to the Bureau of Labor Statistics. Students who graduate into a recession can expect to earn a 10 percent lower wage after a decade of work than they would have earned in a strong economy, according to a 2009 Yale University study.

Then there are the student loans and skyrocketing rents. Nationally, half of all renters are spending more than 30 percent of their income on housing, up from 38 percent in 2000, according to Harvard’s Joint Center for Housing Studies. Also, Freddie Mac found 50 percent of renters who plan to continue renting in the next three years cited the inability to afford a down payment as a factor.

Freddie Mac and Fannie Mae recently set new terms for allowing as little as 3 percent down for first-time buyers. This brings a down payment on the median new-home price of $305,000 to only $9,150. That will attract more millennials, but with an average of only $3,000 in nonretirement savings, according to the Demand Institute, it’s still out of reach for some.

It might be too soon to tell if millennials can afford a down payment, anyway. The older end of the group is reaching the average home buying age, but the younger end is just entering college. “It’s a little premature, I think, to worry or to conclude that millennials won’t have the financial resources necessary to buy homes when they get into their late 30s,” Zandi says.

Millennials Want to Maintain Geographic Flexibility

Sharise Kent, a millennial career coach based in Laurel, Md., has been working with Gen Y for more than 15 years—from high school, through college, and now as they explore the workforce. She says the No. 1 reason why millennials want flexibility is because of their careers and the environment of the workforce.

“You have a lot of underemployed college grads,” Kent says of Gen Y. “But if you’re looking for a job across the U.S., there are way more jobs than if you’re looking in just a particular city.”

The scarcity of jobs has left millennials competing with one another, and being able to pack up and go when an opportunity comes is an advantage. “If you’re tied into a home, it makes it harder to take the next opportunity,” Kent says. “With the competition for jobs with recent grads, the ability to be mobile is restricted when you have a home to sell or rent out.”

And young Americans aren’t just looking for any job—they want the right one. Millennials want to be passionate about their career and, “depending on the field, that may or may not be available in their city,” Kent says, adding that the generation’s preferences and attitudes toward careers varies by age. The younger part of the generation will put in time at the bottom of a company while older millennials seek more of a work/life balance. And while most millennials are dedicated, their attitudes are tainted to be less loyal to their employers than previous generations because of the recession.

“They have a fierce determination to find that balance that gives them life experiences,” Kent says. “They don’t live to work, they work to live. They’re looking to live life, not just climb the corporate ladder.”

Millennials Don’t Want to Own a Home

While the apartment industry wants to believe that the majority of Gen Y will be forever “renters by choice,” experts simply don’t agree.

Credit, affordability, and financial woes seem to be the largest road blocks to homeownership for this cohort, but some millennials simply don’t want to buy—yet.

Mollie Carmichael, a principal at John Burns Real Estate Consulting, says the way millennials were raised is playing into their delayed decision-making. “This is a group that doesn’t have as many rules as their parents,” she says. “To get married by the time they’re 24 isn’t their goal. To have two to three children isn’t the plan, to get married first and then have children—not necessarily their rules.”

And when comparing millennials to their parents (who often are baby boomers), the interest in homeownership has been delayed, but it’s still there.

Carmichael predicts 2019 will be when the majority of the millennial generation will become most interested in buying homes.

“I’m seeing that buyer settle down at age 30 to 31 versus their parents at 24 to 26,” she explains. “As I start to look at consumer insights, I look at interest and when they want to buy. With Gen Y, that’s at 30 and older.”

The desire to own a home is completely different from having the ability to actually buy one. About 62 percent of renters from the ages of 25 to 34 indicated they will continue to live in rental housing for the next three years because they cannot afford a down payment for a mortgage, according to a recent Freddie Mac survey.

Those in the millennial generation eventually will go through the same life stages as previous generations, but it just may take them a little longer.

“It is the American dream to own a home,” Carmichael says. “People associate success with owning a home, and millennials are no different. If I’m not getting married or having children, then there is no urgency to buy a home. And until I do, the urgency isn’t there.”

Millennials Form Households In Different Ways From Past Generations

Many millennials want the typical household with a spouse and kids. They just don’t want it yet. As of 2013, the average age of marriage is 27 for women and 29 for men, compared with 20 and 23, respectively, in 1950. Even more so, Census data shows today’s 18 to 34 year olds are more educated, more poor, and more unemployed than 18 to 34 year olds were 30 years ago. More educated people often get married later in life. Likewise, wealth positively impacts household formation. Since millennials have struggled to save in this economy of high unemployment, staggering rents, and surmounting student debt, most resort to living with their parents because they haven’t felt stable enough to form a household.

That doesn’t mean they don’t plan to in the near future, though. According to the Demand Institute’s “Millennials and Their Homes” report, 34 percent of those currently unmarried plan to marry in the next five years, and 19 percent of those without children today plan to have children in the next five years. By 2018, there should be 8.3 million new households formed, a 38.4 percent increase since 2013.

The ball is already rolling in that direction. The number of millennials living with their parents peaked at 36.2 percent in 2012, according to Trulia, and has been declining slightly over the past two years. Since household formation levels are still stagnating, many millennials are possibly now in the transition period of gaining independence from their parents, but still saving money by living with other adults.

“All the adults who are living with other adults for affordability reasons will start looking to become their own household,” Olsen says.

Millennials Want To Stay In Urban, Walkable Areas

Over the past few years the share of 20-year-olds living in cities has increased, but so has the share of 20-year-olds living in suburban and rural areas. Since the Gen Y population is much larger than Gen X, as more millennials reach their 20s, the increase is only natural.

While there are studies, like a Nielsen survey saying 62 percent of millennials currently prefer to live in an urban setting, Wendell Cox, an urban planner, says reports of millennials ‘flocking’ to cities have been exaggerated. “In context of the total millennial population, it is small,” he says, noting that cities have experienced population growth, but only in their downtown areas (considered within 2 miles of city hall). Areas 3 to 5 miles outside of city hall have experienced a population decrease, often leveling out the downtown growth, he adds.

The problem with predicting millennials’ future preferences for living in urban areas off of their current preferences is that the majority of millennials are in their 20s, an age when most are single and not yet thinking of settling down. An urban lifestyle suits them right now, but as they grow up, get married, and have kids, other preferences like good school districts likely will take priority.

“It’s a wonderful life, but when that first kid comes along that 40th floor balcony is not acceptable,” says Cox.

A survey from the Demand Institute supports this outlook, noting that 48 percent of Gen Yers will look to the suburbs to purchase a home. 

Millennials Will Pay A Premium For Green And Tech Features

In general, millennials place more importance on being environmentally friendly and technologically connected than previous generations, and they want their homes to reflect that.

A Better Homes and Garden Real Estate (BHGRE) survey of 18 to 35 year olds found that 84 percent of respondents believe updated technology is a home essential. Fifty-six percent ranked home technology capabilities as more important than curb appeal. And when it comes to a home’s environmental impact, Gen Y is the most concerned, says Jeremy Burbank, vice president of The Demand Institute.

But cost is one of the largest factors for younger buyers when choosing a home, and even if millennials are interested in premium upgrades, most simply can’t afford them.

The Demand Institute sees interest in additions that help consumers reduce their energy usage. Similarly, respondents to BHGRE’s survey named their most sought-after home technology features as an energy-efficient washer and dryer (57 percent), a security system (48 percent), and a smart thermostat (44 percent).

As such, builders should be selective about the products they include, favoring those that most millennials can (and will) pay for. Thinking small could work for the home’s fundamental design, too; more than any other age group, Gen Y has indicated a willingness to part with square footage to gain better performance.

Even without extra upgrades, builders can gain a green advantage just by promoting the virtues of new construction. “One important thing to note is that newer homes in general, all else equal, do tend to be more energy efficient,” Burbank says. “I think that’s an important benefit to communicate.”