Why Down Payments Are Often the Barrier to Homeownership for Millennials


Millennials, the generation born from around 1980 through the mid-90s, have hit peak home-buying age. A 2017 report on generational home buying trends by the National Association of Realtors found that those under age 36 currently make up the largest share of home buyers (34%). Of that group, 66% are first-time homebuyers.

Despite being the largest homebuying group by size, millennials are actually behind previous generations when it comes to homeownership. According to a Pew Research Center report from December 2016, homeowner households headed by an adult younger than 35 are at 35.2%, down from 41.2% in 1982, though this may not be surprising, considering that millennials typically marry and have kids later than previous generations.

For many millennials, the concept of a monthly mortgage payment isn’t necessarily the deterrent to buying a home; after all, with the increased popularity of urban living, countless millennials afford to pay expensive monthly rent in major cities. The trouble often comes from an inability to scrape together enough savings for a down payment, one of the toughest costs of entry to the housing market.

Here’s how numerous economic conditions conspire to make it a difficult environment for many millennials to gather down payment dollars.

A perfect storm: millennials struggle to save for down payments

Zachary Conway is an associate at Conway Wealth Group, a financial planning business in New Jersey, and he’s also a 29-year-old millennial who just bought his first home. Conway says he and his peers are in a generation where scraping together a down payment is a major challenge due to a number of hurdles.

“The prototypical example is, we came out of school into the Great Recession strapped with student loan debt and struggled to find a job,” Conway says. “When we did find a job that had decent pay, it was in a city with a high cost of living. So the focus has been managing cash flow to stay afloat and stay in your apartment, but it hasn’t afforded us the ability to put assets aside for shorter-term saving goals.” So while many millennials are able to afford to live in expensive urban areas, there’s not much left over to save.

On top of that, Conway adds, there’s an emphasis in our culture toward long-term savings like retirement, and most workplaces encourage putting a portion of income into 401ks or other tax-deferred retirement accounts. Conway says overall this is a good thing, but it means some millennials are putting any spare savings toward retirement accounts, rather than short-term savings for needs like buying a car or a first home.

Additionally, Conway says, there’s been wage stagnation in America, whereas housing prices have gone up substantially in many states.

Keith Gumbinger, vice president of mortgage news website HSH.com, says this combination of climbing housing prices and sluggish wage growth is one of the greatest struggles for would-be home buyers, especially younger ones. “It’s hard to save money, and perhaps even more so in markets with rapid price appreciation, as you are always chasing a moving target — and it always seems as though you’re trying to do so with an income that never rises nearly as fast,” Gumbinger says.

As an example, Gumbinger explains, let’s say you’re aiming to save up a 5% down payment for a median-priced home. Using the National Association of Realtor Q3 2017 findings, he says, that would mean a $254,000 home, or a $12,700 down payment, not including closing costs.

“You diligently scrimp and save, and a year passes, and you hit your goal…only to find that home prices have increased by another 6% and are now $269,240 — and your 5% goal is again just out of reach,” Gumbinger says. “Moreover, with inventories of unsold homes very tight, you may miss, or have missed, desirable properties as you continue to sit on the sidelines trying to again catch up. This can be discouraging.”

Another possible reason millennials can’t come up with a down payment: they are trying to save more than they actually need to buy a home. “It’s a commonly-held misconception that a potential home buyer needs to gather a 20% down payment,” Gumbinger says.

Solutions for overcoming the down payment barrier

A full 20% is rarely required these days. “For the most part, and although desirable in many ways, millennials don’t need a hefty down payment per se, but they certainly will need at least some banked funds for the initial outlay, plus a slug of cash for loan fees and such,” Gumbinger says.

The good news is, there are plenty of options for loans that require less than 20%. “Mortgage options with considerably less down are widely available,” Gumbinger says.

The tradeoff with low down payment programs, however, is that you must pay private mortgage insurance which can be quite costly.

In addition to those government programs and private lenders, there are unique programs like Unison HomeBuyer, which provides you with funds for your down payment as an investment, and which can help you obtain the amount you need to get a mortgage. This is an ideal option for some millennials living in expensive cities, where the monthly mortgage payment would be comparable to their rent, but due to high cost of living, they can’t scrape together enough savings for the down payment.

Between student debt, wage stagnation, expensive rent, and soaring home prices across the country, it’s no surprise millennials struggle to come up with down payment money and are buying homes later than their parents. But there are programs like Unison‘s available that allow you to buy a home with less than 20% down and put homeownership more easily within reach.

About the Author
Emily Starbuck Gerson