Rent vs. buy: Millennials take a different path to homeownership

As more millennials move up the earnings ladder, get married and start families, housing is increasingly taking center stage.

Though millennials have a higher number of college graduates than Gen Xers and Baby Boomers, they’re less likely to own a home, according to the Urban Institute. In fact, their rate of homeownership was about 8 percentage points lower than Gen Xers and baby boomers at the same age.

Among the barriers to homeownership, according to the study: delayed marriage, student debt, and choosing to live in high-cost cities. What puzzles analysts is that in many of these cities the cost of renting versus buying a home is about the same.

An analysis by CoreLogic found that the median rent and median home prices in cities with a significant millennial population didn’t show meaningful disparities. In fact, in many markets, the monthly mortgage at the current 4.5 percent interest rate was around the same amount as renting. Of course, it’s important to keep in mind that buying a house encompasses more than just monthly payments, so things like coming up with a downpayment and maintenance costs can be a barrier.

Bigger cities, bigger paychecks, bigger price tags

People who live in expensive cities tend to earn more but they also devote more of that income to housing.

One financial rule of thumb is to spend under 2.5 times your gross income on a house. That means if you or you and your spouse earn a total of $100,000 per year, you generally shouldn’t buy a house that costs more than $250,000. This could be challenging to impossible in places like San Diego and Boston.

“Your cash flow out should be no worse than what you would pay in rent. Now, if you’re paying 50 percent of your income in rent and 45 percent in a house, then I’d say looking at a house is probably worth it,” says Richard Green, director of the USC Lusk Center for Real Estate.

“Three years ago, when interest rates were lower, buying was better from a cash-flow perspective than renting was. But, now that interest rates have gone up, that’s not the case anymore.”

The up-front costs are tough for millennials

Even if you can afford monthly payments, pulling together a down payment is a problem for many young homebuyers.

In Washington, D.C., where millennials make up 35 percent of the population, programs like the Home Purchase Assistance Program, or HPAP, are popular with young singles and families, says Polly Donaldson, director of the DC Department of Housing and Community Development, or DHCD.

HPAP provides up to $80,000 in gap financing and up to $4,000 for closing costs to eligible residents. These interest-free loans don’t have to be paid back immediately.

The chart below shows the cities with highest millennial populations and median home price and rents.

Millennial Cities: Cost of Buying vs. Renting

METRO AREA	PERCENTAGE OF MILLENNIALS	MEDIAN HOME PRICE	MEDIAN RENT
Sources: The Brookings Institution (population); CoreLogic (home and rent prices).
Washington, D.C.	35%	$430,000	$2,200
Austin-Round Rock, Texas	27%	$309,000	$1,700
San Diego-Carlsbad, Calif.	27%	$560,000	$2,300
Urban Honolulu, Hawaii	26%	$570,000	$2,100
Boston, Mass.	25%	$504,000	$2,500
Houston-The Woodlands-Sugar Land, Texas	25%	$240,000	$1,600
Los Angeles-Long Beach-Glendale, Calif.	25%	$615,000	$3,200
Orlando-Kissimmee-Sanford, Fla.	25%	$241,000	$1,600
Seattle-Bellevue-Everett, Wash.	25%	$550,000	$2,600
Chicago-Naperville-Arlington Heights, Ill.	24%	$250,000	$1,900
Dallas-Plano-Irving, Texas	24%	$290,000	$1,800
Las Vegas-Henderson-Paradise, Nev.	24%	$275,000	$1,400
Minneapolis-St. Paul-Bloomington, Minn.	24%	$258,000	$2,000
New York-Jersey City-White Plains, N.Y.-N.J.	24%	$465,000	$2,300
Phoenix-Mesa-Scottsdale, Pa.	24%	$260,000	$1,500
San Francisco-Redwood City-South San Francisco, Calif.	24%	$1,300,000	$4,500
Atlanta-Sandy Springs-Roswell, Ga.	23%	225,000	$1,600
Philadelphia, Pa.	23%	$170,000	$1,600
St. Louis, Mo.	23%	$160,000	$1,300
Charlotte-Concord-Gastonia, N.C.	22%	$230,000	$1,500
Detroit-Dearborn-Livonia, Mich.	22%	$95,000	$1,300
Miami-Miami Beach-Kendall, Fla.	22%	$300,000	$2,000

Seattle, both expensive and millennial dense, is one of the highest-priced housing markets in the country. Median home prices are $550,000, so finding an affordable home is no easy feat. Although there are down-payment assistance programs, they only go so far in a place where home prices are prohibitively expensive for most homebuyers.

“The city has remained really committed to helping first-time homebuyers, but we’ve also recognized that even our down-payment assistance programs is a challenging model,” says Jennifer LaBrecque, program manager for the City of Seattle Sustainable Homeownership & Weatherization program. “We provide $55,000 in deferred down-payment loans to buy a home, but if you look at what a low-income person can afford and what a house costs, that money goes toward closing that gap but not all the way.”

The down payment is just the beginning. Buyers should also factor in property taxes, insurance, applicable association fees and repairs. The average homeowner’s insurance premium, for example, is about $1,000.

Although homeownership is alluring for a number of reasons, Green says, it’s not right for everyone. Here are some questions would-be homeowners should first ask themselves:

Where will you be in the next 5 to 10 years?

If you’re not planning on sticking around in the same house for at least five years, then you should consider renting, says Ilyce Glink, author of “100 Questions Every First-Time Home Buyer Should Ask.” This is a real estate principle known as “the 5-year rule.”

“It’s really hard to break even in less than five years, unless you buy a really ugly property, fix it up and the market is right, then you might get lucky and make money. But you can’t count on it,” says Glink.

It typically takes five years to get ahead because selling a house is expensive. Home values typically don’t increase fast enough to offset closing costs if you sell too quickly. These costs can eat away at your bottom line if you don’t have sufficient equity built up.

“In the end, buying and selling is going to be about 10 percent of the value of the house right there — it could even be more than that,” says Green.

The five-year rule is especially important for young buyers who aren’t sure if they’re going to change careers, want more space or start a family.

The opposite is true for millennials who plan to live in the same house for many years. These folks should consider buying because, over time, the house will likely appreciate in value.

“You still have to pay to live somewhere. For most Americans the biggest portion of their net worth, where their retirement cash will come from, is in their house,” says Glink. “And the way they get there is by paying down their mortgage every year, the faster the better. What they do — without even thinking about it — is they stockpile this huge amount of savings.That’s where homeownership becomes a better deal.”

Do you have an emergency fund saved?

Renting is advantageous because the fixed costs are relatively inexpensive compared to owning a house. When you rent, you don’t have to worry about costly repairs.

“You need to make sure you have some money put away if a furnace or an HVAC system dies. That could be $10,000 right there. Boom,” says Green.

“You have to ask yourself: do I have access to that kind of money? The driveway needs paving. The roof needs replacing. And even in good homes these systems wear out every 15 to 20 years.”

Homeowners who don’t have rainy-day funds run the risk of accruing debt by using credit cards or taking out loans. This could cut into  the financial benefits of owning.

Millennials have to ask themselves, says Glink, what are they willing to sacrifice to be homeowners?

“Owning a home costs money and millennials are very focused on experience. That’s eating out or traveling to everybody’s weddings or international travel. Are you prepared to give that up? Are you prepared to give up your weekly massage? Where are you willing to trade off?” says Glink.

Do you want flexibility or stability?

Your lifestyle is another factor in whether you’ll be happy as a homeowner. People who don’t want to be pinned down to one city might find homeownership a burden. It’s difficult to accept a job offer in another state when you have to sell your house first.

Conversely, people who want to live in a particular area for many years will likely find comfort in knowing they can’t be evicted by a landlord and that their monthly housing payments will remain constant.

“When I talk to millennials about renting or buying there’s an issue of timing and there’s an issue of money. And timing is everything. They have to ask themselves: ‘Am I going to be switching jobs and moving cities? Do I want that kind of flexibility? If they do want flexibility because they’re still figuring out where they want to live, then renting is a good solution,” says Glink.

~Natalie Campisi, Bankrate

Seattle home prices soared by 100 percent over past six years, study says

Average home prices in the Seattle area have skyrocketed by nearly 100 percent in the six-year period after the post-recession housing market hit bottom in 2012, says a new report released Thursday.

That was the steepest price hike among the largest 20 cities in the U.S. and well above the national average, according to the study released by the real estate sales and analysis site Trulia.com.

The report found that home values in the nation’s largest metro areas increased by an average of 53.1 percent from 2012 through 2018. But in the Seattle metro area, home values shot up by 99.6 percent.

A major factor fueling the sharp home price increases in Seattle – and other metro areas that have experienced soaring home prices – has been the rate of population increase exceeding the pace of new home construction.

In the Seattle metro area, the population has grown by two people for each home construction permit issued from 2012 through 2017, which forces home prices upward.
In addition, employment has ballooned by 12.4 percent during the same period in Seattle, the report says.

The new report found that home prices in urban areas increased by more than double the rate as rural areas – 53.1 percent in cities as compared with 27.9 percent in rural counties.

The reason: many metro areas have seen robust growth in jobs while many rural areas have stagnated.

In the 100 largest metro areas, population expanded 4.8 percent, while population in rural counties fell 1.0 percent.

~Komo News

Improving supply helps slow escalating home prices in Western Washington

House-hunters in Western Washington can choose from the largest supply of homes in three years, and they are facing fewer bidding wars, according to officials from Northwest Multiple Listing Service.

New statistics from the MLS show prices appear to be moderating (up about 6.7 percent overall), but brokers say they are not bracing for a bubble, or even anticipating a quick shift to a buyers’ market.

“There have been incremental increases in listing inventory the past few months,” noted Gary O’Leyar, the designated broker/owner at Berkshire Hathaway HomeServices Signature Properties, but, he added, “By no means have inventory levels reached a point that is deemed to be a balanced market.”

Area-wide, the number of active listings of single family homes and condos (combined) rose 16.2 percent, but 16 counties reported year-over-year drops in inventory; of those, nine had double-digit decreases from twelve months ago. At month end there were 18,580 active listings, the highest level since September 2015 when buyers could choose from 19,724 listings. Compared to July, inventory was up nearly 11 percent.

The latest numbers from Northwest MLS show wide-ranging changes in the volume of active listings when comparing the 23 counties in the report. In Clark County, inventory doubled from a year ago to lead the list based on percentage gains. King County was runner-up with a 74.3 percent increase, rising from 3,329 active listings a year ago to 5,803 at the end of August.

System-wide there is about two months of supply, but less than that in the four-county Puget Sound region – well below the “balanced market” range of four-to-six months.

Supply was replenished in part by the addition of 11,994 new listings during the month, up slightly from the year-ago total of 11,781.

A slower pace of sales also contributed to the boost in supply. Brokers reported 10,109 mutually accepted offers last month, a drop of 14.8 percent from a year ago when they tallied 11,867 pending sales.

“The Puget Sound residential housing market remains positive, though the market has transitioned from a frenzied state to one of strong sales activity,” remarked J. Lennox Scott, chairman and CEO of John L. Scott Real Estate. “We are seeing stability in the affordable and mid-price ranges in all market areas,” he said, citing “one of the best job growth markets in the nation” and favorable interest rates as contributing factors.

George Moorhead, designated broker at Bentley Properties, commented on buyers “still sitting on the sidelines despite clear indicators.” He believes, “This is the best time in three years to be aggressive in the marketplace” given rising inventory, a significant increase in the number of cancelled and expired listings, and more incentives being offered by builders. “We are now seeing price reductions in new home communities as builders try to move inventory of completed homes,” he noted.

With expanding inventories “buyers are definitely taking more time to make a purchase,” stated Mike Grady, president and COO of Coldwell Banker Bain. “This creates a declining curve in pending transactions compared to last year,” he explained. MLS figures show last month’s pending sales in the four-county region were the fewest during August since 2012.

In the four-county Puget Sound region, pending sales were down more than 20 percent, ranging from a 12 percent decline in Pierce County to a drop of more than 23 percent in King County. Referring to King County’s sparse, 1.9 months of supply, Grady emphasized it’s “still a seller-oriented market” with prices continuing to rise at a faster clip than the rate of inflation and the historical 10-year average sales price increase of 3-to 3.5 percent annually.

Unlike most counties, Thurston County nearly matched year-ago levels for both pending and closed sales. “Last month was the second best ever for closed sales in our area,” noted Ken Anderson, president/owner of Coldwell Banker Evergreen in Olympia. He attributes the achievement to the area’s relative affordability. “We continue to present the most affordable options when compared to the other major counties along I-5,” Anderson stated, adding “Demand is very high.”

With more homes on the market in the tri-county area, growth of home prices has slowed, noted OB Jacobi, president of Windermere Real Estate. “Buyers are under less pressure to bid on any home that comes on the market,” he remarked. “Despite what some of the headlines may read, this is no cause for panic; in fact, it’s good news because it’s an indication that we are moving closer to a more balanced market,” he suggested.

The median sales price on the 9,288 completed sales of single family homes and condos during August was $405,000, up nearly 6.9 percent from the year-ago figure of $379,000. All but one county reported price gains, including a dozen counties with double-digit increases; the exception (San Juan County) had only a small 1.7 percent decrease.

For single family homes, the median sales price was $415,000 overall, a 6.4 percent year-over-year increase. Single family homes in King County continue to command the highest price at $669,000, up 2.9 percent from the year-ago price of $650,000, but down from May when a countywide median price of $726,275 was reached, the highest so far this year.

Condo prices also rose by 8.1 percent area wide and 11.3 percent in King County. That segment also experienced a slowdown in sales, with closed transactions off by about 15 percent. Inventory shows signs of improving, with active listings jumping nearly 58 percent, but there was still only about 1.7 months of supply at the end of August.

“The real estate sky isn’t falling,” said Dick Beeson, who acknowledged the “huge increase in inventory the past few months speaks volumes about the anxiety levels sellers have as they try to get all they can before the market crashes, which it won’t. The Northwest still has the best economy in America,” Beeson emphasized.

Why the run-up in listings?, Beeson asked rhetorically. Sellers have read about exorbitant prices and the need for inventory, he explained, adding “I guess we should have schooled them a bit about a phasing in process and not to bunch up at the listing house door.” The velocity of the market is still strong, with well priced and conditioned homes still selling in a matter of days or a few weeks, Beeson stated. “Only now there are just 3-to-5 offers, not 50.”

Several brokers commented on the importance of realistic pricing. “You can’t underprice a home in today’s market, but you can overprice it,” Beeson stated.

Northwest MLS director John Deely agreed. “Sellers should be careful to avoid overpricing as savvy buyers are wary of properties pushing the upper end of the market. Properly priced properties will still see heavy activity in this market. Sellers of homes that linger on the market are reducing their prices to spur activity.”

Deely also said many buyers are coming back into the market but being more cautious by presenting offers with standard contingencies such as inspection and financing provisions.

“Homes that are priced and presented right are still garnering multiple offers, but unlike the past few years, buyers aren’t having to waive protections with their offers,” Scott said.

“Pricing is becoming increasingly important,” Grady emphasized. According to his analysis, recent listings are averaging 22 cumulative days on the market, while other properties listed prior to August are now averaging almost 50 days of marketing time. “This points to pricing and how sellers may have overpriced their homes in the spring and early summer and now have to adjust their asking price.”

Affordability is an ongoing concern, particularly for first-time buyers wanting to live near job centers. In King County, for example, nearly 60 percent of the current inventory of homes and condos has an asking price of $750,000 or higher. Despite that challenge, brokers are upbeat about what Scott describes as a more “normal pace” with buyers having greater selection and availability.

“Even with some doom and gloom about sales being down in many counties, inventory doubling in some areas, and appreciation holding at around 8 percent for the year, our market is still very healthy and recovering from the depleted inventory of the past three years,” remarked Moorhead.

NW Multiple Listing Service

Nearly 2-year streak broken: Seattle no longer leads nation in home price increases

After 21 months of leading the Case-Shiller’s home price index, the latest report shows that Las Vegas has overtaken Seattle as the nation’s hottest housing market. It reflects the mood Seattle has been seeing so far, with many realtors and reports expressing a bit of a slowdown in the market.

Case Shiller’s report has a bit of a lag, this month’s report uses June numbers, so time will tell if Seattle’s summer season brought a little more frenzy to the market. But even the most recent Northwest Multiple Listing Service report (on July’s figures) has seen a steadily improving supply, and slight drop in sales.

“In Seattle and King County supply is at the highest level since first quarter 2015, which has me thinking about the longevity of seller luxuries like offer review dates, pre-inspections, and escalation clauses,” Robert Wasser, owner of Prospera Real Estate and an officer of the Northwest MLS board of directors, said in the report.

“People are taking notice of the evolving real estate landscape ̶ even my mom tells me she’s noticing more for sale signs!”

However, King County is still well below a balanced market of supply of four to five months; right now King County is boasting about 1.5 months. And in Case-Shiller’s latest report the metro area registered a 12.8 percent increase in single-family home prices in June compared to a year earlier.

But either way, the latter number dropped from 13.6 percent, and the city is now enjoying its time as number two on the hottest cities nationally according to Case-Shiller.

~Zosha Millman, Seattle PI