Sometimes loan officers are asked the simple questions, “Why should I buy a house? Is it a good investment?” Here in the United States the enthusiasm for buying a home remains remarkably strong. Recent surveys found that almost two-thirds of Americans think that buying a home is the best long-term investment a person can make.
But is buying a house really a good investment? There are plenty of non-monetary benefits to owning a home, but is buying a home a good financial call? As always, it depends on your individual situation, but generally the data suggest that compared to the stock market, buying a home has produced similar or better returns with less risk—especially over longer horizons.
If you compare the increases in the prices of homes and stocks by looking at the S&P 500, stocks seem much more attractive. Since 1975, the S&P 500 has increased more than twentyfold while over the same period, the Zillow Home Value Index, which tracks the value of the median house in the United States, has only increased in price fivefold. Once dividends and rents are included, however, and after accounting for taxes over the period from 1975 to present, the annual return of the S&P 500 is about 10% versus housing’s nearly 12%!
As a homeowner you don’t just benefit from the increase in the price of your home, you also could receive rent, or living in it “for free” after the loan is paid off. There are tax benefits in the form of deductions, versus actually paying taxes on stock dividends or bond income.
And the difference between 10% and 12% might sound small, but over a long period of time it can compound to quite a big difference. Over 40 years an annual return of 11.6% means that a dollar would grow to almost $80 but at 10.4% that same dollar would grow to just over $52. A difference of only 1.2% each year compounds into a difference of more than 50 percent over 40 years.
Born between 1979 and 2000, “Millennials” also known as “Echo Boomers” or “Generation Y,” are key to today’s purchase market. Based on 2010 U.S. Census data, there’s approximately six million more Millennials in the prime “First Time Homebuyer” age group (ages 20 – 31) than there were Baby Boomers in the same age group in 1977! Because of the sheer size of this entire group – about 89 million total – Millennials represent an enormous first time homebuyer opportunity both today and into the future. So it’s important for any loan agents, builders, Realtors, and potential borrowers, to know a little more about them. After all, agents will want to lend to them, and other borrowers may be competing with them to buy homes.
According to research firms, Millennials are typically cautious when making large purchases – almost half consider themselves “savers,” and about 80% are bargain shoppers that stick within a tight budget.
With their practical economic outlook, obtaining a good deal on a home purchase may be a primary goal for Millennials. Smaller homes with stable financing options may be a good fit; and with the recent trend in favor of government financing, FHA loans may play a large role in their home financing needs.
Analysts believe that this is the most likely group to purchase a home in the next two years in comparison to any other age group, although many of them are still in college. They’ll start hitting the home buying market en masse in 2015, and by 2017 they’re in the peak time for home buying. Just in terms of numbers, this group is hugely important. They, unlike their parents, are choosing lifestyle over work style. They’re the ones that are likely to choose a home based on their ability to canoe on the weekends, if that’s what they do. They’re also choosing transit and close-in locations much more than their parents did, preferring urban locations or at least denser environments to the suburbs.
There are more people born between 1980 and 1999 – what the Census Bureau defines as Millennials – than any other generation. So their economic clout is obvious. How has the recession affected the job market for Millennials, which in turn impacts their ability to buy a home?
According to Wells Fargo Securities, LLC Economics Group, a greater number of young adults are now employed in leisure & hospitality, and retail industries than before the recession. These two industries employ the largest share of Millennial workers and a growing number of young adults are finding employment in these low-paying sectors. About 45% of employees in the retail sector and 60% in the leisure & hospitality sector are Millennials.
Traditionally, most young adults have found employment in industries that require few skills and more flexible hours. This has held true among the Millennial generation, mainly because of the weak labor market. Millennials have also moved into lower-paying industries at a faster rate than their older counterparts. Conversely, the construction and financial industries have evidenced a decline in the share of young workers and the manufacturing and information industries employ the least amount of young adults.
What does this mean for the lending and housing market? If indeed younger people are filling out the ranks of lower-paying jobs, they tend to have lower incomes, and take longer to save for a down payment. Creative programs may have to be developed, and with them various underwriting policies, in order to encourage first time home buyers who will lead to current home owners being able to move up.
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