Millennials appear to be in no rush to ditch their parents’ homes. Perhaps they should be.
More adults between ages 18 and 34 are now living with mommy and daddy than ever before, according to the Pew Research Center. And the millennials who have fled the nest have increasingly become renters rather than buyers, a major reason the U.S. homeownership rate hit a 48-year low earlier this year.
But times are changing. Job prospects are improving and wages are showing signs of breaking out. Those factors alone suggest conditions are favorable for home buyers. Yet record levels of student debt are weighing on millennials and that could prompt them to miss out on a ripe opportunity to buy.
Consider the coming S&P/Case-Shiller Home Price Index, due Tuesday. Economists polled by The Wall Street Journal estimate home prices across the nation rose 5.2% in the 12 months ended in October, up from a 4.9% increase in the comparable period a month earlier.
Home values have been increasing recently at an annual clip of about 4% to 5%, pushing prices closer to precrisis records.
Of course, that is good news for current homeowners. They reap the benefits of seeing home values appreciate by more than twice the rate of inflation. But that doesn’t help a millennial skittish about becoming a first-time home buyer. Rising home values make it even more difficult to muster 20% for a down payment.
Furthermore, the benefit of ultralow mortgage rates won’t last forever. The average 30-year fixed-rate mortgage was still under 4% in December, according to Freddie Mac. With the Federal Reserve expected to keep raising interest rates at a measured pace in 2016, they should move higher as well.
If, for instance, 30-year mortgage rates rise by one percentage point a year from now and home prices rise by another 5%, a monthly mortgage payment could jump by around 18%.
Rising prices and interest rates may please the older generation, but not the one that hasn’t yet begun climbing the property ladder.
The fear of missing out—or FOMO, as the kids say these days—should prompt millennials to act now.
Article credit to realtor.com
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