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- Millennials are making three key decisions that are cumulatively wiping out the starter home.
- The typical millennial is renting longer and buying later, surpassing the need for a starter home.
- A delay in homeownership gives millennials more time to build wealth, meaning that for some their first home is a million-dollar luxury home.
- Some rich urban millennials prefer to rent in the city and buy a vacation home instead of a primary residence.
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Millennials are known for wiping out industries, and the starter home may be next.
First-time homebuyers needed 23% of their income to afford an entry-level home in the second quarter of 2018, an increase of 2 percentage points from the previous year, according to The Real Deal. Last May, the median price of previously owned homes was $264,800, the most expensive it’d been in a decade.
For millennials across all income levels, a more expensive real-estate market is at the root of how they’re wiping out the starter home – and it’s unfolding in three key ways.
1. They’re renting longer and buying later.
Millennials are waiting longer than ever to buy homes.
“The whole real-estate industry now is characterized by extreme scarcity and inventory,” Spencer Rascoff, Zillow’s CEO, told Alyson Shontell, Business Insider’s US editor-in-chief, during a 2017 episode of the podcast “Success! How I Did It.”
Two years later and it’s still a seller’s market, according to Zillow. This causes home prices to shoot up, leaving minimal inventory at the middle and low end of the housing market, Rascoff said.
“As a result of limited starter-home inventory,” he said, millennials “are renting longer.”
Homes are 39% more expensive than they were nearly 40 years ago, according to Student Loan Hero. A report by SmartAsset found that in some cities, the average home outweighed the average income by so much that it could take nearly a decade to save for a 20% down payment.
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And fewer 25- to 34-year-olds are living with a spouse or partner, Business Insider’s Akin Oyedele reported in 2017, citing Census Bureau data. It suggests that milestones like marriage that often precipitate buying a home are happening later.
Student debt has also hit an all-time high, making it harder to take out a mortgage.
By the time many millennials do buy homes, they’re older and less likely to move around as they settle down. They’ve also had more time to build wealth, meaning they might be able to afford higher-end homes.
2. When they do buy, they have their eye on luxury homes.
When millennials buy their first home, “they’re buying a much nicer home than a prior generation,” Rascoff said.
He added: “Many people are basically skipping starter homes; they’re renting until their 30s, and that first house they buy is a million dollars, and they just are not even buying the $200,000, $300,000, $400,000 home, which is a total mind shift as compared with previous generations. So they’re still buying homes – they’re just buying them later and buying them bigger.”
Toll Brothers, the largest US luxury-home builder, said that nearly a quarter of its 2017 sales were to those 35 or younger, Bloomberg’s Prashant Gopal reported.
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“These people, who may each have 10 years of work under their belts, can afford a first home that is more luxurious than what one thinks of as the typical starter home,” Fred Cooper, Toll Brothers’ senior vice president of investor relations, told Gopal.
Megan McGrath, an analyst at MKM Holdings, told Gopal that these buyers were the oldest of millennials but that more would come.
“Part of it is generational – millennials didn’t feel the need to buy a starter home, and maybe couldn’t and they waited until they were in their 30s,” she said. “Maybe now they’re just skipping over the starter home and buying a higher-priced alternative.”
3. They’re buying vacation homes instead.
Then there are wealthy city-dwelling millennials to consider, some of whom buy vacation homes before, or in lieu of, a permanent home.
They’re renting in cities but buying country houses, Farran Powell of The Street reported in 2015.
Carl Shepard, a cofounder of HomeAway, told Powell there was a big increase in millennials entering the vacation-home market. Those in their late 20s and 30s are buying vacation homes to build wealth, he said, and they rent them out when they’re not living in them.
Powell said Shepard encouraged his 25- and 30-year-old kids in San Francisco to buy a vacation home instead of a primary residence.
“San Francisco is so out of reach for the average person, but Big Sur isn’t, and certain parts of Sonoma,” Shepard told Powell. “The notion of buying your second home first is a wealth-building activity.”
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It’s an investment move in costly cities like New York and San Francisco, where median-priced homes sold for $1.6 million in 2018.
In 2015, New York started to see a swing in urbanites seeking vacation homes in the Hudson Valley because of rising rents that made it hard for working young people to save a substantial down payment, Michelle Higgins reported for The New York Times.
“For less than $350,000 – an amount that barely buys a studio in brownstone Brooklyn these days – they are finding that they can afford homes with three bedrooms or more on several acres of land, sometimes on lakefront property, or with a pool,” Higgins wrote.
As first-time homebuyers consider second homes, they’re bypassing the starter home.