January 19, 2017
Millennials were just graduating high school or college when the housing market collapsed and the economy entered the worst downturn since the Great Depression. Frustration over lack of jobs and stagnant wages forced many young men and women back into school, where rising school tuition shackled them with substantial student loan debts. Furthermore, here in California, continually rising real estate prices and the extraordinary cost of living make saving for a down payment extremely difficult. Due to these significant hurdles, for most millennials the prospect of owning a home may seem insurmountable. It’s no wonder that homeownership among those under age 35 has been falling.
However, perhaps even more than other generations, millennials are beginning to view homeownership as fulfillment of the American dream, and as their careers take off, many are reaching a point where they are ready to take the next step. In today’s Bay Area real estate market, there are a number of reasons why buying a home is an attractive proposition; a very low mortgage interest rate, homeowner tax benefits, and a steadily appreciating real estate market are among the most significant. Understanding each of these would be a diligent step to take before entering into homeownership.
First of all, mortgage interest rates for home loans are still extremely low, but are likely rising this year and beyond. With a low rate, this means that, over the life of the loan, homebuyers will potentially save hundreds of thousands of dollars in interest payments. Right now, rates are the lowest they have been for some time, but there is some indication this will change and the mortgage interest rates will soon start to climb. It would be timely to quickly take advantage of these rates.
While many millennials still value mobility and flexibility in occupation and housing, many are settling into their careers and want to live in an area for more than a couple of years. Buying a home rather than paying rent makes more sense. The cost of rent for an apartment across much of the Bay Area is extremely high, and the difference in dollars between paying rent and paying a monthly mortgage might not be as much as you might think. For homeowners, expenses would include the mortgage payment, insurance, property taxes, and maintenance costs. If these are affordable, it might be worth buying a home because of the eventuality of paying off the mortgage and selling the property to getting a significant return on your investment. Furthermore, owning a home gives individuals substantial tax benefits. Among the most important are tax deductions on the interest paid on mortgage and property taxes.
Finally, homeownership is a core means for Americans to create wealth, and Bay Area homes are still appreciating respectably. While there will always be risk in buying a home, the desirability of Bay Area living, high-tech jobs, and foreign investment money keep the demand for housing very strong. Finding a good real estate agent who can help you find a new home in an appreciating area is key. When time to sell, savvy sellers will likely see a significant return on their investment. Remember that tax laws are friendly to homeowners. The capital gains exclusion allows sellers to keep $250,000 (or $500,000 for married couples) tax-free on the profit of the sale of their primary residence.
Millennials are projected to be a major player in the Bay Area housing market in the next year and beyond. An extremely helpful, completely free tip to potential buyers is to approach a reputable lending institution, have a real discussion regarding finances and credit history, and learn what it takes to be approved for a home loan. Be prepared to receive good advice on things a first-time homebuyer will need to work on in order to get a home loan at a good rate. In any event, potential buyers will have a much clearer picture on where they stand. Buying a home can take a long time, and it’s a good idea to start making plans now or risk getting left behind by rising prices.