When I was in my twenties, my father gave me a coffee mug and a book. The coffee mug was printed with a slogan: “Sex and Real Estate: Get Lots While You’re Young.” The book was about investing in real estate. My father didn’t provide any specific advice with the gifts. He just pointed me in a direction to figure it out for myself.
The book was written in the ’60s, and although the tone was old fashioned and the prices definitely a thing of the past, there was one key concept that resonated with me: If you want to become a millionaire by age 65, all you have to do is buy $1 million worth of real estate in your thirties, with 30-year mortgages, and then pay the mortgages off over time.
Now, this is an oversimplification of a 300-page book into a single paragraph, so hear me out. There are a lot of different ways to apply this concept. Some require a lot of effort — for example, renovating houses. Others involve a lot of risk, banking on appreciation or massive amounts of leverage on investment rentals. I’m not talking about any of that here. I really just want to make one point.
We need to convince millennials that they should stop being renters and buy their first home now.
For whatever reason, that message doesn’t seem to be resonating with our youngest generation of prospective homeowners. Here are three ideas we might try and share with millennials about buying a home today, in early 2015.
1. You do not need to wait while you save huge amounts of money for a down payment. As we all know, the mortgage world is changing rapidly and dramatically right now. A mortgage that might have been impossible to obtain before Thanksgiving 2014 may, in fact, be totally possible now in the New Year. Lender standards are regaining some flexibility. Down payment requirements are going down — now, in many cases, a down payment is only 3 percent of the sales price, or even 0 percent for veterans. Underwriting for self-employed borrowers that was incredibly strict in 2014 is moving back towards a common-sense standard.
The pendulum isn’t swinging back to the wild days of 2006, but if a buyer was dis-qualified by a lender just last month, re- engage! We are in a new market with new guidelines. Potential millennial buyers shouldn’t think that just because they have a high-speed Internet connection and the brains to read between the lines on blogs that they also have the ability to self-qualify — or, even worse, disqualify themselves for a mortgage. We need to strongly encourage them to meet face-to-face with a mortgage professional. Help is free, so take it.
2. When they search for a home, they should find one that meets their projected needs for a decade. As we in the industry also know, people in America typically go through similar life cycles. As you leave the nest of your parents, you have a set of needs for housing that may include proximity to nightlife. After you get married and are living with young babies, those needs change. Mid-forties are considered the peak earning years, and frequently this is accompanied by the last move-up in housing. Mid-fifties can bring on the empty-nester era and the first move down. Retirement in the sixties may combine a second move-down with a location change. They should plan ahead and not buy a one-bedroom condo if they are planning to get pregnant next year.
3. This generation should be encouraged to think of their home as a long-term investment and not an ATM. The challenges that blew up in the mid-2000s came about because of two factors. Easy mortgage credit expanded the pool of buyers, and there was a feeling in the country that the soaring appreciation would never end, so many buyers pulled out their equity and used it to buy depreciating assets like cars and toys. Don’t sacrifice future housing security by doing a cash-out refinance.
If members of the millennial generation buy appropriate homes for a decade, pay mortgages down over time, don’t do a cash-out refinance, and move up (or down) as the family life-cycle dictates, by the time they get to retirement, they can own their housing free of a mortgage. That is something no long-term renter will ever be able to say.
Hey, I know some of them have huge student loans. I know housing is expensive and they don’t want to take on more debt. I know they think that renting gives them flexibility if they want to move across the country. We all faced similar challenges ourselves when we were young. (Okay, maybe not the student debt.)
But we need to encourage the millennials to think long-term about their life and real estate. If they buy today, we can virtually guarantee that they won’t be looking back in ten years saying they made a bad decision when they got a thirty-year fixed rate mortgage under four percent. They will be bragging about the 2015 price they paid as a brilliant financial decision, compared to where values will almost assuredly be in 2025.
So, do we buy them all coffee mugs? I’m not sure of the solution, but whatever we are currently doing doesn’t seem to be resonating strongly enough with the millennial generation. We need to keep trying new approaches until the millennials buy in sufficient numbers to halt the decline in the homeownership rate in America.
Jon Coile is the President of Champion Realty, a regional brokerage in Maryland, and the Chairman of MRIS, the MLS for the Mid-Atlantic.