Financial Independence Begins with a Starter Home

By Lance Marrs

An old expression claims that life begins when the kids leave home and the dog dies. I’m not sure about the dog, but adult kids are staying home longer these days.

Millennials, those born from 1981 to 1997, are cautious about living independently post-college, with a higher than normal percentage of them choosing to remain at home longer. According to a recent COUNTRY Financial Security Index, more than one-third (35.3 percent) of millennials still live with their parents.

Likewise, the National Association of Realtors report Home Buyer and Seller Generational Trends, from March 2016, showed the number of millennials living with their parents had increased nearly 15% from 2006 to 2013.

Although it might seem embarrassing for a twenty or thirty-something to live at home, there’s an understandable logic to their decision. In fact, for the short-term it makes sound financial sense. While at home, they may pay little or no rent to their parents, which enables them to save money as well as pay down or pay off their college debt. This means when ready to make the real estate leap, money that’s been set aside could be used as a down payment on their first house.

In a word, millennials are a frugal bunch and rightly so.

The Great Recession Hangover

To understand their frugality or what may seem to be their reluctance to dive into home ownership, it helps to revisit what was going on in America as millennials were coming of age. That specific window of time is known as the Great Recession, a tremendous economic downturn that began early in 2008 and limped along through 2010.

Ultimately, the downturn achieved infamous status as the worst recession since the 1930s. In the two years from December 2007 to December 2009, for instance, the labor market lost 6.1 percent of all payroll jobs.

As a result of living through such economic uncertainty, millennials developed smart financial habits, preferring to spend cash over taking out loans, and using debit cards instead of credit cards.

Millennials Really Do Seek Home Ownership

There’s a theory floating around the zeitgeist that claims millennials don’t want home ownership. But that’s not my understanding or what market studies tell us.

When Fannie Mae surveyed millennials in 2014, it found that the majority of this demographic said they consider owning a home more sensible than renting. Moreover, many survey respondents were on the brink of homebuying, with 49 percent of them saying their next move would likely be to own a home.

According to TD Bank’s recent First-Time Homebuyer Pulse survey, millennials are the largest generation actively engaged in the housing market. Based on the survey results, 24 percent are actively looking to buy their first home, and 38 percent plan to buy within two years.

Additional research by NerdWallet also shows that a majority of millennials would prefer owning to renting. In fact, their analysis found that millennials look upon owning a home just as favorably as previous generations viewed home ownership.

So, it’s no longer a matter of if millennials will buy their first home, it’s more a question of when.

The Benefits of Home Ownership

When the time comes, as a millennial making your first home purchase you will want to proceed with caution. Buying a home involves taking on a large loan, even though borrowing lacks appeal to most millennials; you will also need to provide a positive credit history.

However, as most homeowners usually discover, the benefits outweigh the liabilities. You immediately start to build equity, which remains an asset on your financial balance sheet. And that equity will enable you to take out a line of credit later on, if needed.

My advice is to not look on it as buying your “forever home.” Consider it an investment, a starter home that will pay you dividends over the long haul. You could be creative and purchase a duplex, renting out the second unit to help cover your mortgage. You could be more of a dreamer and buy a fixer-upper and do most of the work yourself. Or, you could buy a smaller house in an up-and-coming neighborhood to minimize your financial exposure.

Best of all, you’ll enjoy both the freedom and security of homeownership for years to come. No more sleeping in your parent’s basement or worrying about an unexpected rent increase.

Ultimately, it’s a simple question. Where would you rather put your money: in your own pocket or in a landlord’s pocket? The choice is yours.

 Lance Marrs is a veteran real estate broker and developer and is a principal broker at Living Room Realty in Portland, Oregon. Lance can be contacted here.