Saddled with student loan debt, little to no savings and more of a job than a career, many 30-somethings are putting off the purchase of a home. In so doing they are shelving something previous generations viewed as core to the American dream. Is this a savvy financial move, or a bad decision? More importantly, how can young adults know if now is the time?
Takeaways:
Research shows that young adults may view the traditional milestones of adulthood differently
This can mean delaying a home purchase later than previous generations
Even with a delay, a few simple considerations can help them determine when the time is right
Young adults make up a large percentage of homebuyers with those 34 and younger accounting for 31% of new purchases. Despite this, financial and timing concerns are keeping many more on the sidelines.
Knowing when to pull the trigger on your first home is complex, but while emotional and psychological readiness are tough to quantify, several key metrics can help define the financial side of the equation.
Savings
In the past purchasing a home typically meant squirreling away money until you saved a full 20% of a home’s asking price as a down payment. With increases in the flexibility of financing options, those days are long gone. Today young adults purchasing a home average a down payment of just 7%. This isn’t a minimum but an average meaning many are starting with even less. Today the lack of a large down payment should no longer be seen as limiting factor.
Cash Flow
The much more important factor in purchasing a home is in managing monthly payments. Answering the question of how much is too much really depends on your situation. Will you be taking in renters? How much of your income is variable? What are your other monthly expenses?
Experts have historically said that the sum of your mortgage, insurance and property tax expense should rarely exceed 28%. This represents a rather high ceiling, one new homeowners might want to consider carefully. We think a better start would be to consider 20% of your gross pay. This provides a directional upper limit that allows some financial freedom.
Projected Ownership Period
A key factor in the financial impact of any investment involves how long you hold it. Due to closing costs and fees associated with a real estate transaction, some level of commitment is needed to make the decision financially viable. Again, there is no set standard here, but most people stay in a home around 6 - 9 years. This number skews lower for first time home purchasers, and all situations are different. Typically a good rule of thumb for new buyers is to think of a home purchase as a minimum of a five year commitment.
Opportunity Cost
The final and perhaps most important financial consideration involves putting a price on waiting. While quantifying this is not an exact science it is possible to deliver directional guidance. The key data points include current interest rates, true cost of home ownership, rent and the rate at which properties are expected to appreciate.
With so many variables, a consultation with a knowledgeable agent is the best way to understand all the options. A strong agent will not only educate you on the current market and rates, they can also surface some additional factors you may not have considered. If you are on the fence, or even think you are ready to buy, a consultation is always a good idea. It is also fast and free.
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