Millennial Homeownership Could Be Delayed By Years As COVID-19 Eats Into Down Payment Savings

As more people struggle to find their footing amid financial and economic uncertainty around the COVID-19 pandemic, many prospective first time homebuyers could be dipping into their down payment savings to cover their everyday expenses. Because of this, millennials — who make up the majority of all mortgage originations — may find their dreams of homeownership delayed until long after the coronavirus situation is under control. In fact, the average millennial would take 9 months to recoup a single month’s expenses that were taken out of their savings. If millennial renters are forced to dip into their down payment savings for several months, their transition to homeownership could be delayed by years.

Over 42 million people in the United States have applied for unemployment insurance in the last three months as they have either lost some or all of their regular income due to layoffs, reduced work hours, or furloughs. The national unemployment rate currently sits at 13.3 percent. And although programs like expanded unemployment insurance and economic stimulus funds are helping to offset mounting expenses, these measures typically only cover a portion of lost income.

As such, the renter-to-buyer pipeline is already showing signs of leaking as renters struggle to pay rent on time.

According to the National Multifamily Housing Council, which collects rental data from 11.5 million apartment units, 31 percent of renters failed to pay rent within the first week of April, a massive jump from 18 percent during the same time last year, and up from 19 percent in March. 

This rate improved in May, with only 20 percent of renters failing to pay their rent partially or in full in the first week. Still, this was 1.5 percent higher than the same time last year. While this rate is an improvement compared to April, it’s unclear whether this gap was filled with real wages or if renters have resorted to rent relief programs, leaning on their savings, or higher-risk options like credit cards or payday loans.

Struggling Millennial Renters May Have Their Homebuying Dream Delayed By Years

Millennials make up 53 percent of mortgage originations, the largest share among all generations, according to our recent generational trends report. Still, the millennial homeownership rate of 43 percent remains well below the overall rate of 65 percent. With non-homeowners currently making up more than half of the generation and many having postponed their first home purchase until later in life, a sizable number of millennials buying a home these days are transitioning from renting to buying their first home.

Millennial renters looking to transition to homeownership have potentially been saving for a down payment for years. As of April, the median listing price of a home in the United States was $320,000. A down payment of 10 percent would mean $32,000 in savings in preparation for this major life decision. Now during COVID-19 uncertainty, many prospective homebuyers may be forced to draw from these down payment savings to cover everyday living expenses. Depending on which market they live in, they may have to use more savings due to high rents and relatively tighter incomes.

Among counties with populations over 100,000, the average millennial household expenses are $3,770c per month, with a median monthly household income of $4,240 after taxesa.

If the typical millennial household had to use its down payment savings to pay for living expenses, it would take 9 months to recoup the cost of just one month’s expenses — and that’s with an aggressive savings target of 10% of their take-home pay (the 20-year national savings rate average was 6 percent, but recently spiked to 33 percent). If pandemic conditions continue for six months, it would take the average millennial 53 months — over 4 years — to recoup that value back into their down payment savings. Moreover, this analysis assumes that household incomes will return to their pre-COVID levels after the lockdown, and does not account for time ramping back up to full employment or potential salary reductions, which could further delay millennial homebuyer recovery.

Bank Belt Tightening Pushes Homeownership Dream Farther Away for Many First Time Buyers

Adding to homebuyer challenges, some lenders are tightening their lending criteria by requiring higher credit scores and minimum down payments for certain types of loans.

Major banks have recently changed their criteria for home lending by requiring borrowers to secure 20 percent down payments, significantly higher than the millennial median down payment of 8 percent. While this will reduce monthly payments for borrowers, the 20 percent wall is likely too far out of reach for many prospective homebuyers, especially first timers, meaning these buyers will have to look for supported loans such as FHA, VA, USDA or Fannie and Freddie loans. The national median listing price in April was $320,000; a 20 percent down payment would be $64,000. 

Each market varies in its median listing price and therefore the down payment target for homebuyers depends on where they live. However, even when taking into account the local context, our analysis shows that adding an additional 10 percent to a homebuyer’s down payment would require an additional 6.5 years of saving, on average. Of course, this lending and borrowing environment will continue to evolve along with COVID-19, but this illustrates the impact of these rapidly changing lending policies.

Millennials in Urban Markets Primed to Take the Longest Time to Recover Savings

All 593 counties in this analysis indicated needing between 8 and 10 months of savings to recoup a single month’s expenses. The San Francisco Bay Area and Williamson County, TN (Nashville) top the list of toughest markets to recover savings, requiring 10 months of saving to make up for one month of expenses. If households in these markets need to lean on their down payment savings for six months, it would take five years to recoup those losses.

Even though San Francisco has the highest millennial incomes in the country, it also has the highest expenses, primarily due to the very high cost of housing. Therefore, saving money becomes even more challenging in that market.

In addition to the tight balance of income and expenses, homeowner hopefuls in these markets also face listing prices often much higher than the national rate. Eight of the top ten toughest markets had a median listing price higher than the national price of $320,000 in April

Moreover, if more major lenders increase their minimum down payment to 20 percent, millennials in San Francisco who were aiming for a target of 10 percent would need to save for an additional 16 years to meet that new lending criterion.

Top 10 Markets That Take the Longest to Recoup Savings

Rank County Monthly Median Income After Taxa Monthly Savings (10% of Income)b Monthly Expensesc Months of Saving to Recoup 1 Month of Expenses Months of Saving to Recoup 6 Months of Expenses Median Listing Priced Years of Saving Needed for Additional 10% Down Paymente
1 San Francisco, Calif. $8,179 $818 $8,179 10 60 $1,590,000 16.2
2 Williamson, Tenn. (Nashville) $6,180 $618 $6,180 10 60 $685,000 9.2
3 King, Wash. (Seattle) $5,815 $582 $5,704 9.8 59 $725,000 10.4
4 Douglas, Colo. (Denver) $6,622 $662 $6,479 9.8 59 $642,000 8.1
5 Forsyth, Ga. (Atlanta) $6,679 $668 $6,428 9.6 58 $405,000 5.1
6 Ascension Parish, La. (New Orleans) $4,788 $479 $4,565 9.5 57 $278,000 4.8
7 Shelby, Ala. (Birmingham) $4,795 $479 $4,540 9.5 57 $346,000 6
8 Howard, Md. (Baltimore) $6,370 $637 $6,023 9.5 57 $600,000 7.8
9 Midland, Texas $4,707 $471 $4,445 9.4 57 $367,000 6.5
10 Pulaski, Ark. (Little Rock) $3,233 $323 $3,048 9.4 57 $215,000 5.5

*Limited to one county per state

Even Affordable Buyers’ Markets Pose a Challenge to Savers

Even though the major housing markets listed above take longer to recoup savings, those markets also tend to lean away from homeownership by virtue of their home prices. That is to say, the typical millennial isn’t saving for a down payment in those markets because it’s simply cheaper to continue renting.

Based on our Rent vs Buy report, we have tagged each county as being cheaper to rent or buy on a monthly basis. But we’re finding that even in markets where buying is the more affordable option, millennial homebuyers are faced with similar challenges when it comes to saving money back up after siphoning from their savings.

Despite all ten markets having median list prices at or below the national rate, the lower than average incomes in these areas keep the savings patterns in line proportionally with pricier markets.

Top 10 Buyers’ Markets That Take the Shortest to Recoup Savings

Rank County Monthly Median Income After Taxa Monthly Savings (10% of Income)b Monthly Expensesc Months of Saving to Recoup 1 Month of Expenses Months of Saving to Recoup 6 Months of Expenses Median Listing Priced Years of Saving Needed for Additional 10% Down Paymente
1 Terrebonne Parish, LA $3,338 $334 $3,113 9.3 56 $196,000 4.9
2 Kaufman, TX $5,090 $509 $4,731 9.3 56 $262,000 4.3
3 Calhoun, AL $3,473 $347 $3,224 9.3 56 $141,000 3.4
4 Pinal, AZ $3,695 $369 $3,390 9.2 55 $275,000 6.2
5 Baltimore, MD $4,943 $494 $4,530 9.2 55 $300,000 5.1
6 Richland, SC $3,413 $341 $3,116 9.1 55 $232,000 5.7
7 St. Louis City, MO $3,206 $321 $2,922 9.1 55 $187,000 4.9
8 Sangamon, IL $3,516 $352 $3,199 9.1 55 $150,000 3.5
9 Broward, FL $3,871 $387 $3,520 9.1 55 $320,000 6.9
10 Kanawha, WV $3,229 $323 $2,926 9.1 54 $159,000 4.1

 

Methodology

Top 10 County details provided for counties with populations of 100,000 or greater. Millennials are defined here as the population age 25-34.

a Household incomes data for ages 25-34 comes from Claritas Pop Facts Demographics 2020. Federal effective tax rates derived from IRS 2017 data; state and local tax rates as of January 1, 2020 come from the Tax Foundation. 

b The national personal savings rate was 8.0 percent in February. Here we applied an aggressive 10 percent savings rate, representing driven homebuyers.

c Monthly expense rates estimated from the Consumer Expenditures Survey 2018 for ages 25-34 and by region of the country. The ratio of income to expenses from that survey was applied to each county’s income figure to estimate its level of expenses. In rare cases (4 out of 593 counties), expense estimates were greater than income after taxes by 1 to 4 percent. In those cases, expense rates were capped to the level of income after taxes.

d Realtor.com for sale home listings database, as of April 2020.

e Based on the median listing price for homes in that county on realtor.com, as of April 2020.

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