Housing gets more affordable: Why aren't millennials buying?

Future of home prices
Future of home prices   

When it comes to a basic monthly payment for housing, owning is significantly cheaper today for most than renting.

U.S. homebuyers on average pay about 15 percent of their incomes on their mortgages, compared to renters, who pay nearly twice that, according to a new survey by Zillow, a real estate company. This is the case even for first-time buyers who put smaller down payments on their mortgages. Interest rates are historically low, and home price gains are beginning to ease. So why aren't more young Americans buying?

"It's very difficult to come up with a down payment when so much of your monthly paycheck—especially on an entry-level salary—is going to your landlord instead of into your savings," noted Stan Humphries, chief economist at Zillow. "Buying conditions are getting better every day, and in time the allure of fixed housing payments and building wealth through home equity will draw more buyers out of rentals and into home ownership."

real estate millennials couple shopping for new home
Andrey Popov | Getty Images

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The problem may also be geographic. Rent gains are cooling slightly, with a slowdown in 14 out of the 25 largest rental markets, according to a new report from Trulia, but high rents still plague the youngest adults.

"Housing has a 'millennial mismatch': Young adults tend to live in markets where home ownership is less affordable to them," wrote Jed Kolko, chief economist at Trulia.

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Kolko cites Austin, Texas, Honolulu, New York and San Diego as millennials' favorite metropolitan housing markets, but fewer than 30 percent of the homes for sale in those markets are affordable for the typical millennial household.

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"These are markets where the level of home prices is still quite high compared to wages," added Kolko. "There are markets, however, like New York and San Francisco, where millennials earn more than other households, but typically, nationally, they earn less than older households."

The vast majority of U.S. renters today, many of them millennials, say they do want to buy a home someday, but are struggling financially and plan to remain renters for the next three years, according to Freddie Mac.

"It's no secret that for the last several years, consumers have felt more strapped financially, particularly renters," said David Brickman, executive vice president of Freddie Mac Multifamily. "Many renters are not buying homes because of a perceived lack of ability to afford the down payment or mortgage and poor credit history."

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The largest cohort of millennials, according to the U.S. Census Bureau, are among the youngest, ages 22-24, and are therefore not yet at the typical life stage for homebuying. Nearly half of millennial renters aged 25-34, however, say they do expect to purchase a home in the next three years.

"Our economists believe that 2015 will be an important year for first-time homebuyers, as millennials who have delayed home ownership overtake Generation X as the largest generational group of homebuyers," according to the Zillow report.