Why millennials should buy a home today

Sachita Kumar did something that few people her age appear to be doing in 2015: She bought a house.
“We decided that we just didn’t want to pay someone rent, so we decided to own something,” says Kumar, 26, a telecommunications consultant. She and her husband bought a townhouse in Somerset, N.J. and, unlike many Americans in their age group, they were able to afford the substantial 20% down payment. “A reason a lot of millennials don’t own is because of that,” Kumar says.
There are many practical reasons why millennials hold off on buying. Young adult employment has risen to around 7.7%, according to the Pew Research Center, up from 6.2% in 2007. Kumar has advice to those who can afford it: “You should definitely buy.”
She has a point. There are only two metro areas where renting is cheaper than buying for people aged 25 to 34, new data from real-estate website Trulia found. Renting is 5% less expensive than buying in Honolulu and 2% less expensive in San Jose, Calif., but buying is a no-brainer in 98 of 100 metro areas. It’s also 11% cheaper to buy than rent in the New York and New Jersey metro areas, where Kumar bought, and 10% cheaper in Newark, N.J. and San Diego. And it’s more than 40% cheaper to buy than rent in Houston and San Antonio, Baton Rouge and New Orleans, Syracuse, N.Y., Fort Lauderdale, Fla., and Miami, Oklahoma City, and Detroit.
Millennials have received a lot of criticism for holding back the housing market by not buying as many homes as economists (and would-be sellers) would like. Five years into the economic recovery, many continue to live at home with their parents: There were 71% of adults aged 18 to 34 (excluding full-time college students aged 18 to 24) living independently in 2007 versus just 67% in 2015, according to a recent study by the Pew Research Center. Although 74% of millennials expect to buy a home, more than half plan to wait until 2018, a separate survey last month of 6,000 millennial renters by Apartmentlist.com found.

Sachita Kumar and her husband, who recently bought their first home.

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For Americans of all ages, buying a home rather than renting is 36% cheaper nationwide, Trulia concluded. That’s the biggest difference since 2012 when it was 38% cheaper to buy than rent. For those aged between 25 and 34, it’s only 23% cheaper than renting. One caveat for all would-be buyers: Interest rates have returned to near historic lows of 3.85%, after climbing to 4% last year, but many economists expect rates to go up again within the next 12 months. An increase of 25 to 50 basis points could push mortgage rates to a range of 4.15% to 4.4%, he says, but rates would have to nearly double to about 6.5% to equalize the buy versus rent equation for potential young adult buyers.
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Trulia calculated the initial total monthly costs of owning and renting, including mortgage payments, maintenance, insurance, and taxes, based on September 2015 home prices and a 30-year mortgage with a 3.9% interest rate, with a 20% down payment for households moving every seven years. It also crunched the future total monthly costs of owning and renting, plus federal tax deductions and a 25% tax bracket.
“We calculated net present value, which reveals the opportunity cost of using money to buy a house instead of investing it,” says Ralph McLaughlin, Trulia’s housing economist. What’s more, home-price growth has continued to outpace rent growth since 2012, he added, but many people — especially in big cities like New York and San Francisco — are unlikely to be able to afford to buy in the same neighborhoods where they rent.
And yet there may be a less obvious reason, aside from the financial commitment, why so many Americans are reluctant to buy: Bureaucracy. “There is a substantial amount of paperwork,” Kumar says. “The bank goes through everything like the FBI. It’s a very gruesome process and takes months.”
Even the most innocuous deposit can raise a red flag. Case in point: Kumar’s bank noted some cash deposit of a few thousand dollars. “This goes back to the whole banking crisis,” she says. “Banks used to give loans out like crazy and then they all got into trouble.” Not so, anymore. “They will catch anything that looks kind of funky if it wasn’t paycheck-related,” she adds. Case in point: It’s traditional in Indian culture to give cash at a wedding rather than a gift and Kumar’s bank asked about all cash deposits. “When they asked, I told them, ‘Dude, I just got married.”