Millennials reluctant to build home equity

It’s a tale that has been told over and over — millennials just aren’t buying homes and instead are sticking to renting.

The absence of millennial homebuyers is a big story for the economy, because housing sales and construction are big drivers of jobs. But it’s also an equally big story for the personal finances of millennials, who are missing out on the real estate wealth that bolstered the balance sheets of previous generations.

“The most impactful contributor to consumer wealth since the great financial crisis has been growth in home equity,” said Brad Friedlander, managing partner at Angel Oak Capital Advisors. “Similarly, there has been a growing wealth gap between homeowners and renters, largely due to home equity.”

According to the Federal Reserve, U.S. owners held more than $13 trillion in home equity at the end of the third quarter of 2016. That’s the highest since the start of 2006, before the housing bubble burst, and more than double the crisis-era low of just under $6 trillion in home equity for U.S. owners.

In other words, housing values have soared, but renters haven’t shared in the wealth. Worse still, consider that as the economy recovered around 2010, rents have climbed steadily. The typical renter is now paying about 20% more than in September 2010.

This trend comes as median household incomes remain below 2007 levels, which means the dip in homeownership U.S owners held more than $13.0 trillion in home equity at the end of the third quarter of 2016. That’s the highest level since the start of 2006, before the housing bubble burst. rates couldn’t have been timed worse for millennial finances. And without home equity to bolster their family balance sheets, these younger Americans are significantly behind older generations — in homeownership and the future financial security associated with it.

However, it doesn’t have to stay that way. Millennials still have the opportunity to tap into the housing market’s potential. While underwriting standards are indeed stricter than prior years, “some people could qualify for a mortgage who don’t even try,” said Lawrence Yun, chief economist at the National Association of Realtors. Yun points to FHA mortgage products that require only 3.5% down, just $8,750 payment toward a $250,000 mortgage, as well as interest rates near historic lows that reduce the cost of borrowing significantly over time.

If young homebuyers embrace the idea of a “starter home” the way previous generations have instead of simply lamenting how their dream home is out of reach, they often will have ample opportunity to enter the market, Yun said.

“Maybe they need to lower their expectations of what that first home should be or settle for a smaller home in a different neighborhood,” he said. But if they do, these young homebuyers can build equity over time.

“The most impactful contributor to consumer wealth since the great financial crisis has been growth in home equity.”