As the mother of two recent college graduates, I think about the financial world that my millennials are inheriting and it is both fascinating and frightening. Sometimes, the volume and speed in which information is transmitted these days can make me dizzy and I wonder how different my choices would have been if I had access to the amount of information so readily available today.
I remember the old clichés and sage advice of my parents – save for a rainy day, start saving early, take advantage of employers 401(k) match, don’t put all of your eggs in one basket, and certainly dump those high-interest rate credit cards! Growing up, I can remember hearing about the American dream of owning a home. In 2005-2006, that dream turned into a nightmare for many who were counting on the equity in their home for retirement. How many of us saw our biggest asset sink into our biggest liability? In the flip of a dime, our entire perspective on what was a good investment was turned upside down.
According to a national survey reported in U.S. News, millennials have been reluctant to buy homes for many reasons, such as a volatile and at times depressing job market, high student loan debt, and delaying of marriage and having children. In addition, the difficulty in getting a mortgage and concern about home prices dropping again did not help the situation. The percentage of millennials owning a home dipped to a low of 36.3 percent in 2014, according to the U.S. Census data, despite the perception in the industry is that the current numbers seem to be improving. As homeownership rates for younger Americans appear to be trending upwards, experts are hopeful that they will recognize the benefits of owning a home. Millennials, like the rest of us, are inundated with investment proposals and many financial experts agree that young adults should be investing in the purchase of a home as part of a sound financial plan for the following reasons.
Reason #1 – Mortgage payments are an investment in the future, as opposed to rent payments that go into the pocket of the landlord. As the balance on a mortgage is reduced, home equity increases, which allows padding of the retirement account, instead of the landlord’s.
Reason #2 – Buying property in a solid market is a good investment because it will increase net worth.
Reason #3 – Tax breaks can be substantial. Mortgage interest and real estate taxes are deductible. In addition, homeowners usually don’t have to pay capital gains tax when selling if the property value increases by less than $250,000 and if the home has been occupied as a primary residence for more than two years.
Reason #4 – There are many emotional and psychological benefits of homeownership. Renters are less likely to create a reliable local support system and less likely to be invested in the community. Homeownership often evokes a sense of pride and can play an important role in restoring faith in the American dream.
Reason #5 – With interest rates still at an historic low, borrowing money to buy a place to live at a fixed rate for 30 years locks in payments for the future even if interest rates (and rents) rise.
Reason #6 – With the uncertain future of Social Security, 401(k) and IRA accounts, owning a home that has been paid off when approaching retirement will help to ensure a healthier financial portfolio.
According to the National Association of Realtors (NAR) 2016 Quarter 1 Homeownership Opportunities and Market Experience (HOME) Survey, 75 percent of people believe that now is a good time to buy a home and 45 percent believe that strongly. Not surprisingly, those who are currently renting, those who are under age 34 and those who live in urban areas are less confident that now is a good time to buy. However, even among those groups, the majority feel that now is a good time to buy a home due to current home price acceleration.
The position that buying a home is a smart choice is supported by billionaire hedge fund money manager, John Paulson. Paulson believes buying a home to live in is the best investment possible. “I still think, from an individual perspective, the best deal investment you can make is to buy a primary residence that you’re the owneroccupier of,” Paulson said at a Delivering Alpha conference presented by CNBC and Institutional Investor.
Clearly, there are many benefits to owning a home at any age. That being said, homeownership is not for everyone. It is important for young people in particular to make sure that they are receiving good advice from professionals that they can trust. Make sure that they can afford the carrying costs of the home with plenty left over for reserves, repairs and emergencies. Are they planning on staying in the area long enough to recoup the closing costs if they need to sell? Is the home in an easily marketable area? These are questions that can be answered by competent, trustworthy real estate, mortgage and financial professionals. The purchase of a home should be part of a balanced plan for the future and not a short-term impulse.
As the summer approaches, it is time once again to contemplate barbeques, vacations and fireworks. Let’s hope that as we move into June and through July 4, financial independence through homeownership continues to bring stability and growth to our millennials, our home values and the American dream. Laurie Dubow
