A Millennial Decision – Buy a Home or Not?

A Millennial Decision – Buy a Home or Not?

Millennials are inundated with investment advice every day. They hear:


  • Start saving early
  • Take advantage of your employer’s 401(k) match
  • Get rid of the credit cards, especially the high interest ones.


I know that when I was young, purchasing a home for $90,000 seemed daunting.  It was my biggest purchase ever!  Interest rates were 6% – 7% and they seemed low compared to the early 80’s in the Reaganomics times.  Now, layer in investing in the equity and/or bond markets and a millennial may get paralyzed with the affordability of both “investments”.


But for many who are looking to build a retirement nest egg, financial advisors such as us, at SJK Wealth Management believe purchasing a home is one of the best investments millennial’s can make.


Buying a home is one of the biggest financial decisions you can make as early as your 20s in our opinion.  Real estate is a hedge as it is typically inflation-protected and offers low correlation to the stock market.


Nationwide, millennials have been reluctant to buy homes for various reasons including a volatile job market, high student debt and the delaying of life events, such as marriage. The rate of homeownership for millennials dipped to a low of 36.2 percent in 2014, according to U.S. Census data, although it’s also worth noting that the millennial generation represents the largest percentage of first-time homebuyers.


Financial and real estate professionals say the numbers are now slowly improving, and we are hopeful that more millennials will soon recognize the benefits to homeownership. Here are some reasons why young adults should be investing in the housing market:


You’ll spend smarter. Rent payments go straight into the pocket of the landlord – and at the beginning of the next month, you’ve got nothing to show for it.   You are not building equity in anything.


Mortgage payments are an investment in the future.  As the remaining balance on a mortgage is reduced, home equity increases, padding part of your own retirement account – and not your landlord’s. Better to spend your money on your own home than on unnecessary, short-term expenses that won’t provide value later.  When you rent, you are paying off the landlords (owners) mortgage – not yours.


Consider the resale value. Property in solid markets such as New York, Miami, San Francisco or Philadelphia may be a good investment because those areas attract professionals who want to be there for a long time. Buying in areas where the market is trending up can help increase net worth.


Home prices in the Big Apple doubled between 1990 and 2000 and again between 2000 and 2012. The Standard & Poor’s 500 index saw a huge 315 percent increase from 1990 to 2000, but only a 14 percent rise from 2010 to 2012.


Homeownership has many emotional benefits. Homeowners are more likely to be invested in the local community and develop interpersonal relationships that create a reliable support system than those who rent properties.


Low interest rates. Borrowing to buy a place to live is seen by banks as a much safer investment than credit cards, and interest are still at historical low rates.


Supplement your retirement income. If you’re a millennial, you could benefit from having a home as a storehouse for retirement funds, and their homes will likely be paid off by retirement.  What I mean as a storehouse is simply having an asset that is paid off when you retire will provide equity that could be used for funding part of retirement.  Obviously, you’ll still need a place to live when you retire, but you could earmark some of the profits for retirement.


This will help millennials supplement their 401(k) and IRA accounts, which will become increasingly more important as the U.S. struggles to fund Social Security.


Do the math; make sure you can afford the payments.  Ask yourself questions such as, how long will I stay in this home?  What are the other fixed expenses?  You need to weigh renting versus buying.  There are upfront costs to buying that over the long run dissipate and you are building equity with every payment.


Happy House Hunting!


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.


SJK Wealth Management and LPL Financial do not provide mortgage, legal or tax services. Please discuss your specific situation with the appropriate professional prior to investing.