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Are Millennials Cheating Themselves by Buying Homes Later?

NEW YORK (TheStreet) -- Millennials, the generation born from the early '80s to early '00s, have been starting families and buying homes later than their predecessors, thanks to the Great Recession and its ripple effects. Many experts have assumed this is temporary. But what if it isn't? Are these young folks cheating themselves?

A survey by Zillow, the online home marketplace, suggests this pattern could have legs, with first-homebuyers' average age rising to 32 over the next 10 years, from 31 last year and 30 in the years before the housing collapse of the mid-2000s. 

The survey of housing experts looks only at millennials who do buy, while many others are just continuing to rent or live with parents. Nationally, the homeownership rate has fallen to less than 65%, from 69% just before the housing collapse.

"The national homeownership rate fell in the second quarter, and a majority of experts said they expect it to fall further in coming years as the millennial generation delays home purchases and the age of typical first-time homebuyers rises," Zillow says.

This can be sobering news for homebuilders and companies that sell home furnishings. Because those are big industries, a slowdown in household formation is not good for the economy.

But it doesn't necessarily mean millennials are on the road to financial ruin. 

On the downside, home prices will probably rise over the next decade, so folks who postpone a first purchase will miss some appreciation and pay more. Interest rates are also likely to rise, pushing up the cost of that first home even more. Buying later rather than sooner also means missing out on benefits such as the federal tax deduction for mortgage interest.

On the other hand, there's a strong case that in the past many young people leapt into home ownership too young. During the housing bubble of the early '00s, many renters borrowed to buy because, even though they knew homes were overpriced, they thought they had to get in before prices climbed out of reach forever. They were among those left owing more than their homes were worth after prices collapsed.

So a little more caution is not a bad thing. 

The job market for young people is weak, and those who do find work are likely to switch jobs more often in the future, so locking into a first mortgage can be pretty risky. Those who will have to move for a new job within four or five years of buying a home could lose money.

Experts have long known that homes are, on average, not the great investments the real estate industry says they are. Annual appreciation averages only 3% of 4%, and mortgage interest, taxes and upkeep can wipe out those gains. Many millennials have better profit potential in their 401(k)s, and with ordinary taxable investment accounts, which allow quick access to money in an emergency.

Over the long term, owning is better financially than renting, so long as the owner can stay put for a number of years and does not buy a pricy home when a cheaper one will do. The "profit" in owning a home comes from the lower long-term expenses compared to renting. But real investment gains are easier to come by with holdings that don't have big carrying costs such as taxes and maintenance -- things such as stocks, bonds and mutual funds.

So millennials who are postponing home purchases may not be doing the economy any favors, but they're probably not hurting themselves, either.

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