Millennials Greatly Underestimate How Much They Need For a Down Payment

Mish

Millennials want to buy a home but underestimate how much they need for a down payment.

Expectations vs. Reality Gap

The Expectations vs. Reality Gap is huge when it come to millennials desire to own a home.

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.

Time Needed to Save a Down Payment

Time Needed for Down Payment in 100 Largest Cities

Click on the above link for an interactive graph of cities.

Assuming a saving rate of 8% and a 20% down payment, in Austin it would take 11.8 years to save a down payment, Chicago, 9.6 years, Denver 12.8 years, Los Angeles 25 years, San Francisco 18.3 years.

Budget Realities

  • 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.

I somehow doubt that Detroit, Pittsburgh, and Toledo rank high on the dream list of cities for millennials to live in.

Mish

Comments (48)
No. 1-16
PecuniaNonOlet
PecuniaNonOlet

My son just got a decent paying job, told him to save as much as he can, talked to me about trading stocks....lol.

21 days till election.
3 days till Boris Brexit Bonanza.
2 days till PecuniaNonOlet votes blue all the way down!

Sechel
Sechel

Millenials also under-estimated the cost of their college debt

FromBrussels
FromBrussels

What really amazes me is the low median home price !....Here in Belgium, or Flanders rather, it is 260K euro on average, near Leuven, where I live you can buy nothing below 400K...

IA Hawkeye in SoCal
IA Hawkeye in SoCal

A lot of false information here Mish. For example, in L.A, not everyone buys in the city of L.A. proper. Far and away most commute to areas like Santa Clarita, Riverside, even Temecula where home prices are much lower. Homes in L.A. are easily over $1 Million versus suburban homes from $350k to $750k depending on area.

Also, who puts down 20%? Most put down 3.5% and take a 0.5% increase in their interest rate instead of paying PMI. Then a couple years later refi to lower their rate and remove that "penalty".

Home buying isn't for everyone, in all cities. It's a lot easier in the Midwest than it is on the coast, and not everyone will be buying on the coast. But if you take a typical professional couple, each bringing in $60k to $120k depending on profession, you're talking a household income between $120k and $240k. In my circle that's pretty common, but I also work for a huge company and attend a large church. In my neck of the woods, anecdotally, most people I know are homeowners and this is the 15 Freeway corridor, basically Fontana/Rancho, Eastvale, Corona/Riverside.

PreCambrian
PreCambrian

In coastal California you might be able to find a house for less than $600k which means a down payment of $120k. The absolute minimum property tax on this house would be $6k (assuming no local taxes such as school bonds, improvement districts, etc.) or $500/month added to your mortgage payment.

Carl_R
Carl_R

Nebraska has a special finance program for first time buyers, called NIFA. The required downpayment is typically $1,000. For people with income less than 50% of the average income, they provide a grant of $5,000 which does not have to be paid back.

Other states probably have similar programs to help first time buyers.

Zardoz
Zardoz

The American Dream is now the American Fantasy.

KidHorn
KidHorn

Are these numbers for 1st time buyers? or all buyers? Because if they include all buyers, many would be rolling over profits from selling their existing homes. Not a good number to go off when comparing to 1st time millennial buyers.

Casual_Observer
Casual_Observer

I somehow doubt that Detroit, Pittsburgh, and Toledo rank high on the dream list of cities for millennials to live in.

They never will be. This is why more of the population is fleeing south and southwest. But even these places are becoming more expensive. My parents live in a Dallas suburb where the value of their home has doubled in the last 10 years. It is an old house in a below average school district. It is reminiscent of California in the early to mid 90s where even below average places boomed. In the end there is more money floating around to be lent to investors and above average speculators. Speculators can and do make money in real estate everywhere. Millennials should prepare to rent for a long time.

Six000mileyear
Six000mileyear

They learned nothing from the housing bubble.

Markab
Markab

Does this really matter? Millenials get the downpayment from their Boomer parents, who have done massively well in the stock & housing markets. Just like the stock market, housing will keep going higher.

And before you judge, I've been largely out of the stock market since 2009 and I'm relatively young--worst decision I've ever made. I've been long gold since 2005...OK decision. I've been listening to the likes of Hussman for a decade now due to his analytical analysis (I'm a scientist). But, maybe I'll mark the top of the stock market as I'm seriously about to dump many hundreds of thousands into it now after having missed out on a five fold gain over the last decade. But, if the Federal Reserve couldn't stand to see Lehman fail, why would they let the (much much bigger) stock market fail. They won't.

Eddie_T
Eddie_T

Austin.....you can find a starter home that is FHA qualifying out in Round Rock or some other burb for about $275K...and with a first time buyer FHA lets them get in for 3.5%..which would mean a downpayment of less than 10K ($9625).

The median price is skewed by neighborhoods like mine, where the $1M mark is getting to be the new low end....3X what I paid in the early 90's. Downtown condos are super expensive, especially for what they are.....not sure who buys those...but lots of people, apparently.

In my experience, millennials tend to be great savers.....and fairly financially adroit, many of them. They have come of age in a time when you can't just fall off the turnip truck and do well.

My kids are all millennials...my eldest (now age 37) has been in her first house now for five years....she bought her house for $195K in 2015...To give you some idea of price movement, I bought the house next door to hers in 2018 for $259k. They are comparable.

The $62K downpayment number you cited is skewed...by people moving from high end markets to a lower one and moving up to more house...people further along in life. Also by the highest end cities.

Home ownership is still a good idea...but honestly....my experience has been that lower end homes appreciate faster than high end ones......in a market like Austin, a high end home is a trophy more than an investment.

Interesting that you looked at Corpus Christi. That town is a real sleeper. I would retire there...or at least buy something there with that in mind for the future...... if the missus would hear of it. Low growth has kept prices there very affordable.....not much gentrification yet....lots of potential. A world-class marina downtown that is so cheap it makes Florida or the West Coast look crazy in comparison.

SAKMAN
SAKMAN

Not surprising, I have spoken with many millenials that were more adept at insulting people that have experience in their fields than actually getting into the arena and competing.

Its hard to have any knowledge at all when you dont go out and obtain it.

Snarla Hazard
Snarla Hazard

Now that I've retired early I'm taking my small divested fortune and moving back to Southern Illinois and get a little place for cheap and put on the money on auto-pilot and live modestly and donate the balance of the interest to charity.

numike
numike

"The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear."
Antonio Gramsci

Rocky Raccoon
Rocky Raccoon

A life of enslavement to government debt and societal norms that puts them deep into debt after graduating high school as they chase paper.


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