It’s hard to miss the headlines about how today’s younger, first-time homebuyers are overtaking the market. The National Association of REALTORS® (NAR) reports that nearly one in three home purchases in 2014 were by a first-time buyer and millennials (aged 18-34) are the largest share of home buyers in the country.
After years of being called “Generation Rent,” why are younger buyers finally entering the market? Below, we explore why it’s a great time to be a first-time homebuyer.
1. You don’t need a 20 percent down payment
First, buyers are finding that it’s not necessary to have a 20 percent down payment. Many lending options exist for younger buyers whose student loans or high rent have prevented them from saving a large lump sum. Loans from the Federal Housing Administration (FHA) allow for a 3.5 percent down payment, and new options from Freddie Mac and Fannie Mae will allow a down payment of just 3 percent. (Fannie Mae already has these loans in place and Freddie Mac will roll them out at the end of March.) Keep in mind that to decrease risk for the lender, additional standards may be set on loans with smaller down payments. The loans may require mortgage insurance, homeownership counseling classes and a credit score of 640 or higher. Talk with a home mortgage consultant for information on how to apply for a mortgage with a low down payment.
Another win for first-time homebuyers: the Federal Housing Administration recently reduced annual mortgage insurance premiums by 50 basis points, from 1.35 percent to 0.85 percent. This will make homeownership more affordable and attainable for credit-worthy buyers.
2. You don’t need five years to save for a down payment
Speaking of down payments, buyers are finding that it doesn’t take as long to save as they previously assumed. According to NAR, 69 percent of first-time buyers were able to save a down payment in less than 18 months and half saved it in less than one year. Buyers who have tightened their purse strings for the last few years are finding they can enter the buying market now.
3. Renting is twice as expensive as buying
According to national real estate database Zumper, Minneapolis is the 10th most expensive rental market in the nation. Across the country, the average renter spends 30 percent of their income on rent, while homeowners nationwide spend only 15 percent of their income on mortgage, on average. With rent double the price of owning in many markets, renters are finding that buying is a sweeter deal. Plus, a fixed rate mortgage means your monthly mortgage payment won’t increase over time, while renters in Minnesota and western Wisconsin are at the mercy of their landlords when it comes to rental price increases each year.
4. Our local affordability is high
While renters are being priced out, millennials are buying homes simply because they can afford them. A recent report from NAR ranked Minneapolis as one of the ten best cities for millennials to buy a home. Our strong local economy, fantastic job opportunities and high home affordability are all cited as factors in the report. Meanwhile, the Harvard Joint Center for Housing Studies shows that 52 percent of renters in Minneapolis have the income and credit scores necessary to buy a home. When you realize you can afford a home, it’s hard to keep writing monthly rent checks.
5. The starter home you want is out there
Despite coming of age in the era of the “McMansion,” Generation Y doesn’t have grand ideas for their first homes. According to the National Association of Home Builders, 68 percent of first-time buyers purchase a home with under 2,000 square feet and half buy a home with under 1,650 square feet.
Here in Minnesota and western Wisconsin, we have plenty of homes in this realistic space and price range, from Richfield ramblers to Inver Grove Heights townhomes to split-levels in River Falls. If you find you have a higher budget, you’ll find even more homes in your price range are available.
6. Interest rates remain low
We talk about interest rates a lot, but it’s almost impossible to overstate their importance. When interest rates are low, your buying power increases and when rates increase, even gradually, they can deeply cut into what you can afford.
Interest rates have been low for a few years and buyers have been taking advantage. Now, as our market balances out, we expect that interest rates will rise to nearly 5 percent by the end of 2015. First-time buyers can capitalize on low rates by securing a mortgage now, before the rates increase.
7. The best kind of peer pressure
Across the country, the average age of first-time homebuyers is 31. Our high affordability means that in Wisconsin, the average age is 29 and in Minnesota, the average age is just 27 (NAR). After years of assuming that a home purchase was far into the future, those 25-34 are watching their friends buy homes—and realizing they can, too.
8. Because they want to
The best reason for buying a home, of course, is not because of low interest rates, because your best friend (or high school nemesis) did or because you finally scraped together a down payment. The best reason to buy a home is because you want to. According to a BMO Harris Bank study published in June, three quarters of U.S. millennials plan to purchase a home in the next five years. Not only does this signal continued growth in homeownership for this demographic, it also shows a definitive rejection of the “Generation Rent” moniker. While a recession, student loans and high rental costs have prevented Gen Y from buying at the rate of their predecessors, their version of The American Dream also includes a home to call their own.
Fired up about buying a home? Reach out today for guidance on the first-time home buying process, or to be connected with a local real estate agent who can help you on your way.