Recently, for the nth time, I was listening to a housing
economist discuss
the Millennial generation – again predicting that they will be a generation of
renters. I heard the well-worn litany of arguments: this
generation witnessed their parents get burned on their homes during the
recession, Millenials don’t believe that
homes are an investment, they have difficulty getting mortgages, they are forming
relationships later in life, etc., etc.
I agree that in the immediate aftermath of the housing crisis, these
factors were true and valid. But these
issues are temporal and rapidly fading – and certainly not a permanent
condition of the Millennials.
My experience is this:
young people have recovered confidence, want to own a home, can now get a
mortgage and, most importantly, are smart enough to know that buying a house is
a no-brainer. I also believe they have acquired
wisdom from observing their parents: they want smaller, greener, lower
maintenance homes - a home that works
for their lifestyles and priorities. (
see my post on rightsizing your home for a happier life)
With the proliferation of rent-versus-buy calculators, I was
curious to check the numbers for myself.
I took a look at buying a house in our project,
Skyview, as compared to renting a similar
home in the area. In my analysis, I
took the ‘no investment’ perspective of the young buyer and assumed zero
appreciation over 15 years. At first
glance it appears that home ownership is more costly than renting -- by about
$4k per year. (check out the numbers
below) But when you compute the
interest tax deduction and the equity from your mortgage principal,
you save $22k per year versus renting! Over
15 years, that’s $332,000.
Now, let's be a little bit optimistic on home appreciation. Even taking the recent housing crisis into
account, long term home price appreciation roughly matches the rate of
inflation. Three percent per year seems
to be a generally accepted long term housing appreciation rate. If you add this appreciation into the
analysis, your home value increases from $429,000 to $668,000 in fifteen
years. The overall difference between
buying versus renting with 3% appreciation exceeds $572,000! So Millenials out there, consider this:
if you earn $90,000 a year, that equates to 6.4 years
of working. If you value your time and life balance, 6+ years is a lot
of time to sacrifice. Even more striking, according to a recent
Gallup Poll,
the average retirement age is 62 and the life expectancy of someone born in
1985 is just under 75 years which equates to 13 years of retirement.
By
this analysis, if you own a house for 15 years, you could potentially increase
your retirement years by almost 50% from 13 to 19+ years.
So don’t be afraid to buy a house
– be more afraid not to!
In this analysis, I only looked at a 15 year period and did
not take into account the incremental investment income that can be derived
from the savings. As you take these
additional variables into account, the argument for home ownership only gets
stronger.
I don’t pretend to have a crystal ball for the future. We could have another housing crisis and
homeowners may be under water again.
Or, we may high inflation due to all the government spending since 2008
and owning a house may become all the more important as a hedge. Nobody knows and each person has to make
their own decision and risk calculation.
But I know that Millennials are more intelligent than the current
conventional wisdom reflects.
As always, comments and counterpoints welcome. If you want a copy of this spreadsheet, just
send me an email.
Check out Skyview
