The Expectations vs. Reality Gap: Millennials Want to Buy a Home within a Year, but Saving Takes up to 10 Years

• Most Millennials tend to greatly underestimate the amount of money they will need for a down payment.

• The national average down payment is about $62,000, but 40% of Millennials expect it to be less than $10,000. What’s more, 61% of young people have less than $10,000 in savings. Of those, 14% have no savings at all.

• The average savings rate in the last decade was 8%. And, although personal savings went through the roof in April (reaching 33.7%) one month of extraordinary budgeting may not move the needle.

• Considering savings rates, median incomes and median home prices, the time needed to save for a 20% down payment in the 100 largest U.S. cities varies significantly: from 10 years in Los Angeles and around nine years in Long Beach and Oakland, CA to a little more than two years in cities such as Buffalo, NY, Cleveland and Toledo, OH and Pittsburgh, PA.

• Perhaps unsurprisingly, the only large U.S. city where Millennials could save for a down payment in less than two years was Detroit, which makes this market the most attainable.

Homes are flying off the shelves after pent up demand. But Millennials are still barely managing to squeeze into homeownership land. Although mortgage rates are at their lowest point in decades, down payments and low savings are the main hurdles that trip young people up on their path to homeownership. Moreover, the COVID-19 pandemic has added financial uncertainty to Millennials’ existing challenges, wreaking havoc on the economy. As a result, unemployment and financial insecurity might widen the gap between young people’s money saving capabilities and their homebuying goals.

In a nationwide survey of nearly 7,000 prospective homebuyers, Point2 found that 74% of the Millennials who are interested in purchasing a home would like to do so in the next 12 months. However, 88% of respondents between 25 and 40 years old have significantly less in savings than the average national down payment amount, which is $62,600. Moreover, 14% of the Millennials surveyed stated that they hadn’t managed to set aside anything at all, meaning that the desire to buy a home might be in conflict with Gen Y’s budgetary realities.

Mind the Gap: Millennials Have Big Dreams, but Little Resources

Most Millennials Want to Buy a Big House Within 1 Year…

Despite uncertain financial prospects, 43% of Millennials who participated in the Point2 survey stated that they planned to buy in the next three months. In fact, a whopping 74% of Millennials were planning to buy a home within a year.

And not just any home. The majority of young people (76%) would prefer a house to a condo and 53% would like a property between 1,000 and 2,000 square feet.

And these expectations may seem more legitimate than ever. With the pandemic forcing everyone inside, our homes have transitioned into serving all of our daily needs. People must now work, study, exercise and even relax, all in the same home. Therefore, having more space to organize your life is becoming less of a want and more of a need as the office and many other public spaces remain out of reach for the foreseeable future.

but Have Less than $10,000 Set Aside…

Larger homes come with bigger price tags and, inevitably, larger down payments. However, 14% of Millennial respondents reported that they had no savings at all and 47% said they had less than $10,000 earmarked for purchasing real estate.

Considering that the national average down payment amount is $62,600, Millennials’ meager savings and grand dreams could result in a long pay off of the home loan, which translates into thousands of dollars more in interest payments over the life of the loan. And, although down payments of 0% to 5% are possible, they come at a steep cost.

and Save Less than 10% of Their Monthly Income

Aside from limited savings, many Millennials are confronted with another issue, one that the pandemic has greatly exacerbated: low savings rates.

The average personal saving rate in the U.S. is 8%. It has exceeded 10% only once in the past decade. But in April of this year, it shot up to 33.7%. However, one month of pandemic-induced saving does not a down payment make. Fast-forward to May, the personal savings rate dropped to 24.6%, only to reach 17.8% in July. And with government aid discontinued, things might not be going in the right direction for many young people who had wanted to buy a home this year.

However, although 40% of Millennials can only set aside 10% or less of their income, 44% stated they were saving between 10% and 30% of their income each month. Moreover, 7% of respondents between 25 and 40 years old said they were setting aside more than half of their income each month.

Saving money in this climate is a difficult endeavor, but the same pandemic that ravaged some people’s finances seems to have had the opposite effect for others. Specifically, supporting the K-shaped recovery theory — a term coined by Peter Atwater, adjunct lecturer in the economics department at William & Mary — it appears that while some young people or young families are finding it hard just to stay afloat, other Millennials have turned into real super-savers.

Mind the Gap: Down Payment Reality Beats Expectations by Wide Margin

Most Millennials Believe $10,000 Is Enough…

When asked about how much they expected they would need for a down payment, 40% of Millennials stated that they thought $10,000 or less would be enough. But even if they’re considering 0%, 3% or 5% down payment mortgages, very few of the 100 largest cities in the country have houses for sale that are spacious enough to meet Millennials’ pandemic-induced demands.

but in 15 Large U.S. Cities, the Down Payment Is at Least Ten Times That

In San Francisco, the down payment for the median-priced home is $218,229. In 14 other markets — including Seattle, Los Angeles, New York and Boston — the down payment goes from a little more than $100,000 to almost $190,000.

While 24 cities post slightly more affordable home prices, their down payment amounts are still between $50,000 and $100,000. As a result, the majority of the largest U.S. markets require down payments between $10,000 and $50,000.

Which leaves most Millennials… with only Detroit. The down payment for a median home in Michigan’s largest city is $9,879. As such, this is the only market of the 100 largest U.S. cities in which the actual down payment coincides with Millennials’ expectations.

Mind the Gap: Saving for a Down Payment Takes 2-10 Years in 100 Largest U.S. Cities

In 27 Markets, Millennials Need 5-10 Years to Save Enough…

When adding incomes into the equation, the ranking shifts a bit. For example, although San Francisco boasts the most expensive median home, at more than $1,000,000, the median income here is also among the highest in the nation, which makes it slightly easier for young people to buy property.

Meanwhile, the three markets where Millennials need the most time to save for a down payment are Los Angeles, Long Beach and Oakland, all of which are in California. In fact, the Golden State dominates the top 10 list of cities with the longest periods of time needed to save for a down payment. With the exception of the fifth spot, which is claimed by New York, all of the other markets are in California.

but in 26 Cities, Millennials Could Save Enough for a Down Payment in 2-3 Years

However, there are 26 large U.S. markets that are slightly more Millennial-friendly when it comes to homeownership opportunities and possibilities. In 25 of those, it would take Millennials between two and three years to save enough for a down payment, if they set aside 20% of their income each month, without exception. Detroit, the most Millennial-friendly real estate market, has the lowest time frame: just one year and eight months.

The pandemic has ushered in a new lifestyle and almost completely novel work conditions. Consequently, the more affordable markets might make more sense nowadays. And if the current work-from-home scenario extends into the future, cities with more affordable housing could attract more young people and young families, thereby accelerating the move towards the suburbs and exurbs — a trend that, like many others, began long before the pandemic violently pushed the brakes on our former lifestyle.

However, while there has been much talk about the suburban exodus and migration motivated by remote work, Axios Cities Jennifer Kingson notes that it’s “disproportionately older, richer, more established professionals, people who need the city less” who are abandoning the nation’s largest, most dynamic urban hubs. Many Millennials, and especially the younger cohorts, are opting for more economical solutions:

The coronavirus outbreak has pushed millions of Americans, especially young adults, to move in with family members. The share of 18- to 29-year-olds living with their parents has become a majority since U.S. coronavirus cases began spreading early this year, surpassing the previous peak during the Great Depression era. […] The number living with parents grew to 26.6 million, an increase of 2.6 million from February.

Expert Insights

To find out what some experts think about the current market conditions for the younger generations, we talked to several Business, Economics, and Personal Finance professors. Read their interviews below:

Rich Curtis
Senior Lecturer in Finance
Cornell SC Johnson College of Business

What do you think are the main reasons for Millennials’ difficulties in attaining homeownership?

My unscientific guess is that while Millennials are at points in their professional lives where their salaries are on an upward trajectory, many of them likely haven’t saved enough yet to afford a serious down payment. Throw in the fact that many in that 24-39 year-old age group are still making large monthly payments on student loans and it’s not surprising to me that homeownership may not be a prudent financial decision at this point in time.

Do you believe the pandemic affected Millennials’ finances more than other generations’ financial situation?

While some people in most age groups have felt the impact of the pandemic, Millennials are perhaps facing their own unique problems. Those who started small businesses are likely trying to plow every dollar back into those businesses to try to keep them afloat. As such, they aren’t likely to be in a position to buy a new home. And Millennials in corporate America without the seniority to avoid furloughs and layoffs are vulnerable also; they may be similarly trying to save every penny and put off all major purchases until we’re through the pandemic.

What do you think Millennials could do to improve their financial situation and ease their road to homeownership?

Housing in many parts of the U.S., especially the suburbs, has seen high demand as the pandemic has caused some people to rethink the value of an urban lifestyle. Therefore it may make sense for Millennials to continue to save and wait until demand levels off and prices retreat a bit. One suggestion is for Millennials to try to live below their means and put more into savings for their future down payment. If a family is growing and waiting is not an option, then they should perhaps consider fixer-uppers or smaller homes, or consider less popular locations as a way to get into an affordable home more quickly.

James Philpot
Associate Professor and Director of Financial Planning
Missouri State University

What do you think are the main reasons for Millennials’ difficulties in attaining homeownership?

First of all, many millennials have failed to establish good credit. They have, as a group, been slow to leave the nest (thus not starting a credit record by having utility accounts, rent, etc.), and, when they do, they end up with much student loan and other consumer debt. These factors make financing more challenging.

Do you believe the pandemic affected Millennials’ finances more than other generations’ financial situation?

Obviously the pandemic affected many people’s finances. As for comparison to other generations, some generations went through crises while in their 20’s while others did not. For example, many twenty-somethings were sorely affected by the financial/housing crisis of 2007-2009. Those of us who came of age in the mid-late 1980’s-early 1990’s really did not have such an event — yes, there was the 1987 stock crash and the 90-92 recession, but these were short-lived.

What do you think Millennials could do to improve their financial situation and ease their road to homeownership?

1. They should work on reducing existing consumer debt and live on a budget that is well below their means. This will improve cash flow and grow a down payment that will play better in front of potential lenders.

2. They should lower their sights a bit on the type and cost of home they think they need. There used to be what we called “starter homes” that were smaller homes that couples bought when young. Later, as these families grew in size and in finances, they moved up to larger homes. Some time during the 1990s, the concept of starter home seemed to vanish, and young people thought they should start at the same standard of living that their parents were enjoying. They did not realize that the parents’ standard of living came from decades of work, saving, and investment.

Shaun Pfeiffer
Associate Professor of Economics
Edinboro University

What do you think are the main reasons for Millennials’ difficulties in attaining homeownership?

For starters, millennials as a group have had to endure two major financial crises in the last thirteen years. Both of these crises have impacted this generation in the sense of unemployment and a decrease in the value of risky assets such as stocks and mutual funds during each crisis.

In addition, the expectation of having to change jobs many times over the course of a career can, in many cases, diminish the appeal of buying a home due to the higher upfront costs and selling costs that are associated with home ownership.

Finally, the higher costs of a college education have constrained the borrowing capacity of many millennials due to the student loans that were used to finance their education.

Do you believe the pandemic affected Millennials’ finances more than other generations’ financial situation?

The timing of the pandemic certainly isn’t good for people in their mid-20s through their late 30s. I say that because this age group is typically trying to pay down debt, establish their careers, and buy a home. In addition, it’s hard to have a good emergency fund set up during these years in order to make it easier to manage through tough financial situations caused by the pandemic. In short, any financial crisis including the current one caused by Covid 19 is likely to be particularly stressful for this age group.

What do you think Millennials could do to improve their financial situation and ease their road to homeownership?

The first thing that comes to mind is to get settled in your career and relationship. Even if you have no other debt and are in great financial shape, it still won’t make financial sense in most cases to buy a home if you’re having to move every few years.

After that, it’s really important to set up a plan to build up cash reserves and pay down existing debt so that you’re financially prepared to be able to buy and maintain a home as well as manage through the next financial crisis that comes.

Methodology

• Study based on the 100 most populous cities in the U.S., sourced from the U.S. Census Bureau (2018). Population by age, American Community Survey 1-year estimates.
• The median income per Millennial household, adjusted for inflation August 2020, sourced from the U.S. Census Bureau (2018). Median income in the past 12 months, American Community Survey 1-year estimates.
• The median home price per city, adjusted by NAR index for Q2 of 2020, sourced from the U.S. Census Bureau (2018). Median value (Dollars), American Community Survey 5-year estimates.
• The 20% down payment amount calculated based on the median home price in each city.
• The number of years that Millennials would need to save for a down payment based on current, adjusted median household income, adjusted median home prices, and monthly savings rates (two different percentages taken into consideration: 20% of income, which is the recommended saving rate, and 8%, which is the average household saving rate in the U.S. according to tradingeconomics.com).
• The survey was posted on the real estate platform Point2Homes.com between August 21 – September 7, 2020 and had 6,780 respondents.