|Millennials should stay renters if they understand what would be financially good for their situation. / Photo by: Pixelbliss via Shutterstock|
Millennials or the people born between 1981 and 1996 “should be happy they are stuck in renting” instead of bemoaning that they cannot own a home, opined A. Gary Shilling, author of the book The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.
Renting vs. Owning a Home
The top economist, who is well-known for showing ways on how to prosper in the slow-growing times and is the president of a New Jersey-based consultancy A. Gary Shilling & Co., said that millennials should stay renters if they understand what would be financially good for their situation. In the earlier decades, appreciation or the increase in home value is the factor that created the so-called middle-class wealth, but it only happened as monthly loan payments enabled the homeowners to save as well as retire their mortgage debt. Over time, the prices of single-family homes increased because there are bigger new structures created that comes with fancier kitchens, marble bathroom, etc.
House Price Index
Yale University’s Prof. Robert Shiller has previously introduced a house price index that is quality-adjusted. HPI measures the price changes of residential houses from a certain start date. It also serves as an indicator of housing price trends and an analytical tool to estimate mortgage default rates, housing affordability, and prepayments. By comparing the prices of the same house when repeatedly sold overtime, Prof.Shiller’s HPI removes the overestimate price bias. He showed how an average quality-adjusted HPI of single-family home prices has increased at 1.1 percent CAGR since 1972.
|House Price Index measures the price changes of residential houses from a certain start date. / Photo by: Tinnakorn jorruang via Shutterstock|
Mortgage Rate Offset
Another topic pointed out by Shilling is the mortgage rate offset. An offset mortgage is where one has a mortgage and savings with the same lender and their cash savings are also used to “offset” or reduce the amount of mortgage interest that is charged. Since 1972, the 30-year fixed-rate mortgage rates has cost homeowners 3 percent per year before they can own a house before insurance, utilities, maintenance, and taxes are computed. Considering such an amount, it would be a negative return. This is why only a third of the millennial generation owned a house in 2016 compared to half of the Baby Boomer (born between 1946 and 1964) at the same age as millennials today in 1989 and also half of Generation X (between 1965 and 1979) in 2001.
Financial Strains, Homeownership Rate
In a recent survey conducted by health savings accounts platform Lively, it revealed that Americans under 35 are unable to buy a house, pay down debt, and save for retirement. Furthermore, despite being the healthiest, the Millennials and the Genz are the generations that are hit the hardest by the increasing cost of healthcare services. As a result of rising healthcare costs, they cut back their spending on hobbies (42 percent) and put off vacation plans (31 percent). They likewise forego debt repayment (31 percent) and retirement savings (29 percent).
The homeownership rate of individuals below 35 years old has likewise declined. From 43.6 percent in 2004, it declined by 7.2 percent point, which is now 36.4 percent (2019 homeownership rate). But some Millennials are already accepting that they may be unlikely to ever own a home. Mortgage loan company Freddie Mac’s survey showed that 24 percent of renters today are “extremely” unlikely to own a house. Such percent is 4 percentage points lower than the result four years ago. Freddie Mac added that 82 percent of the respondents claim that renting is more affordable to them than buying.
Why Renting Is Better
Personal finance platform co-founder Camilo Maldonado also shared via Forbes that renting a home is better because the true cost of homeownership is actually higher than what others expect. While some think that paying for rent is only a waste of money, it does provide shelter for the renter themselves and their loved ones. Although they may purchase a home, they would end up spending a lot of interest payments, taxes, condo or HOA fees, maintenance and repairs, flood insurance, homeowner’s insurance, etc. Another benefit of renting is that it may cost less even if computed for long term stay.
On the other hand, homeownership is a long-term financial commitment, comes with high up-front costs, and lacks the flexibility that renting a property provides.
Residential Property Price Indices
Intergovernmental economic group The Organisation for Economic Co-operation and Development’s dataset moreover indicates the residential property price indices, which measures the price of residential properties over time, by geographical coverage for the second quarter of 2019. Italy’s RPPI is -0.2 percent, Finland is at 0.8 percent, the United Kingdom at 1.2 percent, Turkey at 1.8 percent, Sweden at 2.2 percent, and Japan at 2.3 percent. RPPI is a macroeconomic indicator of economic growth.
Purchasing a home surely is one of the biggest financial decisions one has to make. That is why it is best to always consider the advantages and disadvantages that come with homeownership.