Why some Millennials are choosing to rent the American Dream

Why some Millennials are choosing to rent the American Dream

After 13 years of living in New York City, conversations with friends have moved away from the latest happenings on the weekend to moving out of the city we promised to never leave. 

As millennials start to build a family, they are coming to the realization that their kids may need a bit more space to play than their apartment allows. This is not an anomaly to just New York City.  Many parents would love to live in the same city they spent their 20s in, but the demand for urban single-family homes exceeds supply.  But the needs of young families haven’t changed – good schools, more space and daily commute options.  

So as my friends consider an exodus to the suburbs, they are faced with the next big question – Buy or Rent?

Renting the American Dream

For past generations it was a ‘no-brainer’ to buy and was considered one of the pillars of the American Dream.

But in today’s housing market and the economic environment, many millennials are still considering renting.   The US homeownership rate, which had peaked in 2004 at 69%, has trended lower to 64% as of September 2018.

Some of the reasons for this decline can be attributed to young families facing more challenges:

  • Higher balances on outstanding student loans

Some reports have the outstanding student loan debt in the US at over $1.5 trillion with average loans per new graduates being over $30k in some states.

  •  Lower wages and real income 

 A recent report from the Federal Reserve, Are Millennials Different?, found  that Millennials earned less than members of the earlier generations when they were young.

Homes are being built at a lower rate per capita with a decrease of in the number of permits being issued in single-family new builds

Rent vs. Buy

It’s not surprising that single-family home rentals are becoming an increasing part of the housing equation for millennials.  The high cost of living in major markets and relatively short supply of family homes suggests young families will continue to rent as they move away from their city apartments.

As this is becoming a reoccurring topic at dinner parties, I decided to look at some numbers using Zillow.com for local suburbs in New Jersey. The area is a popular option for close commutes to jobs in Manhattan, but with more options for housing.

I compared the rent with home prices across a number of suburban New Jersey homes within the same commuting distance and very good school districts.  The monthly housing payments were similar, but with the costs of insurance, taxes and closing fees, home ownership was the more expensive choice.  Additionally, there is the expectation that buyers have a 20% down payment, which can be a lot of upfront cash depending on the sale price.

And once you dig into your savings for that down payment, you have to rebuild to prepare for big ticket household improvement items, like fixing the water heater or HVAC.  As a renter, that responsibility falls on the landlord to handle those high-cost replacements.

Once considered a faux pas, more of my peers see renting the American Dream to be the better financial decision over immediate home ownership.  Renting in the suburbs allows for more time to save for solid financial footing before making such a large purchase.  

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