Millennials: The Homebuying vs. Renting Comparison

Posted by Laine Smith on 4/16/15 8:00 AM

Topics: Home Ownership Home Buying

The Millennial generation is doing a lot of things differently than their predecessors. They're waiting longer to get married and start families and are slow to embark on a large part of the American Dream: homeownership.

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Millennial homebuyers, those in the 18-34 range, represented 32 percent of the U.S. housing market in 2014, up from 28 percent two years earlier, according to the National Association of Realtors. Still, a survey of 1,300 Millennials by EliteDaily and Millennial Branding found that one in four are either very or completely likely to purchase a home in the next five years.

The Cost Comparison

In 2014, U.S. renters paid over $441 billion collectively in rent, up nearly 5 percent from 2013, according to a Zillow report. Rent inflation rates also hit 3.5 percent in 2014, the highest rent acceleration in six years, according to the Bureau of Labor Statistics. The rate is projected to increase an additional 5 percent in 2015.

The median home in America costs $190,000. According to data from RealtyTrac, a Millennial who bought an average-priced three-bedroom home today with a 10% down payment, 30-year fixed rate mortgage at 4% interest and the historic annual price appreciation of approximately 3% would outright own a home worth $426,000 in 2045 and pay a rough total of $373,000 (mortgage, taxes and insurance included).

If that same Millennial rented the same three-bedroom home at the average fair market rent of $1,312 and rent appreciated at 2.7% - the average appreciation for the past decade - he or she would end up shelling out over $700,000 in rent over a 30-year period and have no asset to show for it.

The Advantages of Owning

Homeownership has long been part of the American Dream. On top of having a place to call your own and creative control over your living space, homeowners gain:

  • Equity. If you plan on staying in your home for at least four years and home prices remain stable, homeownership allows you to create equity and stability for your family. Think of home equity as a savings account; should you ever need to need to finance a large purchase, your home equity may be an accessible route to do so.
  • Tax benefits. Come tax season, homeowners get to deduct several items, such as mortgage interest, property taxes, private mortgage insurance, etc. to reduce their tax bill.
  • Stability. If you sign on for a fixed-rate mortgage, your monthly payment will stay the same for the life of the loan, whereas rental rates typically rise over time. The U.S. rental vacancy rate hit a 21-year low in 2014, according to the Census Bureau, giving landlords leverage to charge more for units.

The Perks of Renting

In some instances, renting may make financial sense, particularly if your job requires relocation on a regular basis. While renters are limited by their lease agreement, renters enjoy:

  • On-site amenities. Most apartment buildings feature free amenities, including gyms, pools, tennis courts, etc., that would come at a high cost for homeowners.
  • Flexibility and mobility. According to the U.S. Bureau of Labor Statistics, Millennials change jobs three times more often than older generations. Though breaking a lease typically comes with a nominal fee, renters don't have the pressure of selling their home should a job offer come up in a different location.
  • Convenience and low-maintenance. Owning a home requires maintenance, repairs, yard work, etc. Renters are able to keep home maintenance projects off their to-do lists and out of their budgets.

Both renting and buying have benefits that will suit different Millennials' financial situations and lifestyles. Currently, mortgage rates are low, low down payment options are available, rental prices are on the rise, and programs have relaxed their credit standards, allowing more first-time buyers, most of whom are Millennials, to buy homes.

If you've been on the fence between buying a home and renewing your rental lease, now may be a good time to explore the possibilities of homeownership. Download our free Mortgage 101 Handbook for the basics on home buying and financing. When you are ready to take the next step and get pre-approved, contact one of our mortgage bankers.

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