This article was guest written for Forbes.com by Jarrod Guy Randolph with JP Ackerman, President, Strategic Real Estate Products HouseCanary
If the last decade taught us one thing, it is that too much of a good thing can be bad.
We learned the hard way about the excesses of debt, and that housing prices do not always go up. As a result, our generation is saving less (on average our financial assets are down from the late 1980s), taking on more debt (up 80% since the late 1980s) resulting a leverage ratio that is up 30% to nearly 46% from 1989 to 2013. Far too many are still living at home (not always out of necessity). While it is true that many of our peers have struggled to establish their careers, our generation is off to a slow start financially. What’s most troubling is the sheer number of people who continue to rent homes instead of buying (only 1 in 3 of us own).
When you compare our generation with that of the Boomers, the story begins to unfold. In examining data from the Census Bureau and the Federal Reserve, we found that in 1982, when the average Baby Boomer was 27 years old, 41.2% households under 35 owned homes. Fast forward to the latest data from Q2 2015, only 35.8% of Millennial households (those currently under 35), only 35.8% own homes, marking a drop of 5.4 percentage points over the last 32 years. Ultimately, homeownership directly correlates with net worth causing me to question why more of us continue to rent. The trend began decades ago for wealth creation among Boomers, and with each passing year, this translates into less wealth creation among our generation.
Having helped clients transact of over $1.3 billion in real estate and developing close personal relationships with many of them, I have learned that investing in a home (versus renting) is one of the most lucrative investments you can make.
Most people make the decision to rent on a short term basis, but the years add up and each one is a missed opportunity. In the scenario where a house costs $300,000 to buy versus $1,800 per month to rent, the renter gives up over $38,000 in wealth created in the first year alone ($21.5k in rent paid plus $16.5k in equity created through principle paid plus appreciation and tax deductions). Over 20 years of ownership, the figure grows to over $1M in opportunity cost. The person choosing to purchase a home will have built $448k in wealth (principle paid plus appreciation and tax deductions) whereas the renter simply handed over $580k in rent payments.
The combination of savings (paying down principle balance on the mortgage every month), tax advantages (mortgage interest is tax deductible) and appreciation in home values (over the last 30 years, the compounded annual growth rate of home values is 3.8% annually despite the various housing cycles through that period) makes homeownership the easiest and most logical way to begin building wealth.
In my plea to all Millennials out there to buy a home, I laid out four geographic alternatives for your consideration. Purchase and prosper!
Forbes Best Places for Business, Bureau of Labor Statistics, The Census Bureau, The Federal Reserve Study of Consumer Finance
Subject markets analyses are based on mean local home prices. The financing structure assumed for each property is 20% down payment through 10% cash down and 10% secondary loan. Loan term is based on a 30-year fixed mortgage at 4% interest rate. Further we have calculated the risk adjusted home price appreciation at roughly 3% (~25% less than historical norms) and 3% annual rent increases