For today’s first-time homebuyers, saving for a down payment feels like a Sisyphean task — as personal savings grow, so too do home prices.

This unenviable task is part and parcel of the Millennial generation’s economic reality. This demographic is currently between 26 and 41 years old, the typical age for a first-time homebuyer — yet their experiences have been anything but typical.

What’s eating Millennials?

Despite their high levels of education, Millennials increasingly report putting off buying a house thanks to extenuating obligations and debts, according to a recent study by Legal & General.

For an overwhelming segment of Millennials, qualifying to buy a first home is still years out of reach. Many prospective buyers in this demographic will first need to:

  • pay down debts; and
  • save up for a down payment.

As a result, the homeownership rate among younger first-time homebuyers remains sluggish. As of 2019, only 35% of 25-34 year-olds in California have broken into homeownership, down from 43% in 2006.

In addition to stagnant wages, which have not kept up with the pace of inflation, Millennials also contend with high debt levels. The biggest culprits are student loan debt and medical debt, both of which easily eclipsed inflation over the past few decades. [See RPI e-book Real Estate Economics, Factor 15: First-time homebuyers]

Student loan debt and medical debt throttles this demographic’s ability to enter the housing market. Real estate professionals can draw a clear line between Millennials’ mounting debt and their comparatively weak homes sales volume (and further — dwindling agent fees).

Student loan debt spikes

More than half of bachelor’s degree recipients graduated with debt as of 2020, with the average amount of debt being $28,000, according to the College Board.

Altogether, Americans owe $1.76 trillion in student loans as of Q1 2022, according to the Board of Governors of the Federal Reserve System.

A college student in 1980 might expect to pay $13,000 a year for their tuition. Today, that figure is closer to $75,000 a year, according to Legal & General.

The cost of tuition has gone up at a much faster rate than other goods and services since the late 1980s. From 1998 through 2019, inflation increased 60%. Other industries shot above this rate, including:

  • hospital services, up 220%;
  • college tuition, up 188%; and
  • college textbooks, up 179%, according to the Bureau of Labor Statistics.

Millennials are feeling strained by these ballooning higher education costs. In a survey of 1,000 U.S. adults aged 33 to 40, 71% of respondents reported they were impacted in some way by student loans, according to a February 2021 Harris Poll. Only 29% responded that student loans did not impact their life in any way.

The survey revealed the trade-offs Millennials are forced to make to contend with their student loan debt, including 27% who reported delaying homeownership and 24% who had to cut back on building emergency savings.

Debt affects an individual’s ability to finance a home purchase by:

  • lowering savings rates to be used for a down payment; and
  • increasing their debt-to-income ratio (DTI), demonstrating a reduced ability to repay a mortgage.

Higher education and housing costs have shot past the average Millennial’s income over the decades — all while wages stagnate.

Related article:

Employment and wages highest hurdles for Millennial first-time homebuyers

Policy changes to student debt repayment obligations are currently up in the air. The Biden Administration campaigned on student debt forgiveness of up to $10,000 per borrower and is considering using executive authority to cancel student loan debt, according to USA Today.

Since March 2020, student debt payment requirements have been paused. The administration recently extended the freeze until August 2022. They also indicated they will either announce a plan to help borrowers or extend the moratorium again before the end date, according to the Los Angeles Times.

Related article:

Student debt prevents homeownership for thousands of Californians

Medical debt climbs

Although tuition prices have skyrocketed, hospital services represents the most astronomical price increase for consumers over the past thirty years.

Thus, medical debt delivers a devastating one-two punch for debt-saddled Millennials vying for homeownership.

Lack of medical insurance, surprise medical bills and emergency services have all contributed to medical debt among Millennials, according to Legal & General’s report.

In fact, 35% of Millennial survey subjects reported receiving a surprise medical bill over the last year, according to a Health Care Insider survey.

Of those Millennials receiving a surprise medical bill, 51% reported costs of over $2,000. But 57% of Millennials said they had less than $3,000 in savings to cover the bill.

Just like student loan debt unfavorably alters DTI ratios and savings rates among Millennials, medical debt has the same chilling effect on homeownership.

Related article:

Career Coach: first-time homebuyer considerations

Actionable steps for agents

Student and medical debt looms large over many young first-time homebuyers, hampering their ability to pay a mortgage and accumulate savings for a down payment.

However, real estate agents still have options to assist clients with student and medical debt, including:

  • creating a profit and loss statement with a prospective buyer, detailing their monthly income and debt payments to figure their DTI [See RPI Form 209-2];
  • when their DTI exceeds acceptable levels for a lender to qualify them for a mortgage, informing them about the different student loan repayment plans which may lower their DTI;
  • gathering and maintaining a list of current renters who are unable to buy due to their debts, but who will one day be financially able to become homeowners, sending them FARM letters in the meantime; and
  • adding property management to their list of skills. [See RPI e-book Real Estate Property Management]

The next wave of first-time homebuyers will arrive later and in smaller numbers than seen in previous generations. But they will return, likely after 2025 as prices bottom following the next recession.

Real estate professionals can cater to the Millennial demographic by meeting with them as renters, helping them discover their financing options and distributing marketing materials that address their financial needs. They can focus their efforts in urban areas, where many in this generation will choose to buy. Or, they can diversify their expertise with property management.

On a larger scale, real estate professionals can also make a difference by supporting legislation that creates greater access to housing. When prospective buyers cannot afford to buy, agent incomes also suffer. Real estate professionals are uniquely positioned to help people become homeowners, but they are also at the mercy of their local jobs market.

Related FARM letter:

FARM: Student debt and homebuyers

Want to learn more about first-time homebuyers? Click the image below to download the RPI book cited in this article.