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2010-12-07 17:07:07

Will Generation Y Move Away From Home Ownership?

My friend, Matt Ferrrara, posted an article on Facebook, which contained among other things, the following quote: “The real estate bust has had a significant impact on how generation Y's 83 million Americans view home ownership. As they watch millions of Americans lose their homes to foreclosure, the allure of buying real estate has become less powerful, McIlwain said. "They will be renters by necessity and by choice rather than homeowners for years ahead," he says. "They have lost the confidence of prior generations that home ownership is a way to develop wealth." At the same time, many members of generation Y prefer urban settings to the suburbs they were raised in. "They want to be close to each other, to services, to places to meet and to work, and they would rather walk than drive," McIlwain says. "They say they are willing to live in a smaller space in order to be able to afford this lifestyle."

The complete article can be read at:

This prompted me to add a comment, which is that not owning a home  can undermine one of the legs of financial independence when one goes into retirement. Previous generations, most notably those who either went through the Great Depression, or those who had family members with vivid memories that event, had as a goal to own their home “free and clear”.  Heading into retirement, that is still a valuable goal.

The euphoria of the real estate build up caused consumers to think of their primary residence as an investment, or worse yet, as “get rich quick” vehicles. The bust which followed left many either underwater, or worse yet, foreclosed upon, and with no house.  But Gen Yers will miss out on a great part of building wealth and security if they fail to purchase a home. Let’s thing about this mainly in financial terms, although I would argue that there are many non-financial reasons to buy a home, not the least of which is the security and stability it provides, especially for children.  This was brought home to me this week, when I was asked to appraise a single family home. The owner’s son wants to buy it; the owner has four children, and in order to be fair, he wants to make certain he sells the house at fair market value. The current tenants have been living there 7 years. The day before I was to appraise the property, the current tenant called to ask me if I knew of any other rentals. She and her husband have 3 children, all of whom have been born while they lived in this house. (That’s the stability and security piece, by the way.) In my part of the world, North Central Pennsylvania, houses to rent are scarce, and we have enormous pressure from gas company workers looking for rentals; they have driven our rental prices through the roof. I asked if she had considered buying; at first she said no, and then later said: “But my husband and I got to figuring out how much we’ve paid in rent over the last 7 years, and it is a lot.”  I asked what their monthly rent was; in our market what they are paying in rent would cover a payment on about $130,000—and our median sales price is under $100,000.

I told her how much of a mortgage payment her current rent check would cover, and then added (because I can’t resist): “And if you buy a house, you will end up owning it; if you continue to rent, you have nothing to show for it but rent receipts.”  She asked me to bring her information about properties for sale when I did the appraisal inspection. The owner was there during the inspection; he and the tenant chatted while I did my inspection. He walked out with me and said: “She told me she called you; I’m really glad she did. I feel awful telling them they have to move, and I think they should buy a house. They are paying me a lot of rent.”  I asked if he had basically paid off this house with rent money, and he has. He’s a sharp guy; he did as aggressive a mortgage payback as he could handle. I said: “Yes, real estate is the only investment someone else will buy for you. And we call those people tenants.”

The message we need to get to Gen Yers is that 40 years from now, if all they do is rent, they will in fact, have bought a house—or several houses—for someone else. We currently have an abundance of inventory in virtually every market and outstandingly low interest rates. Neither will last. Those who are waiting for the market to “bottom out” will get hit by rising interest rates on the other end.  Those who don’t take time to do the math will have an unpleasant surprise. A loan at $200,000 for 30 years at 4.5% is a payment of $1013.37 per month. If the interest rate goes up half a percent, the payment grows by 6% (the new payment is 6% greater than the original payment). At 1%; the payment goes up 12%; at 1.5%, it goes up 18%; at 2%, 25%.  There is cost to live wherever you live, even if it is in Mom and Dad’s basement (that cost may be more emotional than economic). Buying a home and paying it off is one step towards financial security; as REALTORS® we should educate Gen Yers about this. Whether they buy a suburban house or a city condo, they should buy instead of rent.



Melanie McLane is a speaker, writer and consultant to the Real Estate Industry. She explores the powers of numbers and the math of financing in her course, “Dollars and Sense”, one of her presentations for the 2010 Triple Play Convention in Atlantic City, New Jersey, Dec. 7, 2010.

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