Are Starter Homes an Option for Millennials?

Starter homes have been popular for 30-somethings looking to get out of the rental lifestyle. There are benefits to owning a home that rentals don’t provide, like flexibility with home improvements and landscaping. You get to truly make your home, yours. But, forever homes can feel like a stretch at that young age for most homebuyers. Typically the forever home is larger, for a potential growing family, and therefore more expensive. So, for young renters looking to finally get into owning instead of renting, a starter home seems like the perfect solution.

Is it possible to own as a millennial?

Let’s face it, for most 30-somethings, let alone 20-somethings, it just doesn’t feel like it’s in the budget to afford that dream house. The down payment aspect of it alone keeps us from moving forward. So that forever home we want doesn’t seem to fit into our plans in the current stage of our lives. But starter homes help us out of the renting lifestyle and are more manageable because we can go into it knowing it’s temporary, or if we take some of the guess work out of figuring out how much we can afford, then we might actually have home buying turn into a reality. Rental prices have actually been increasing over the years. This can be particularly seen in larger metropolitan areas—San Francisco alone has a median rent of $3,950 for a one-bedroom apartment. And if interest rates are low, then a starter home is something to truly consider because with lower rates, owning a home is more manageable. Plus, a great reason for a young person to buy a home would be to make an investment. When renting, you’re putting money into something that you’ll never own. Since rental prices are high, and seem to be increasing, instead of paying for monthly rent, you could get more in the end if that amount was applied to a mortgage payment instead.

But millennials have actually been driving the housing market in recent years. How is this possible if buying a home feels out of reach at 30?

Millennials not only can buy a starter home in the suburbs, but forever homes are also a possibility due to costs.

According to recent studies by Zillow, half of all homebuyers are under the age of 36. One of the reasons why it’s an affordable option for the young homebuyers, is the climbing rental prices that are driving millennials out of renting and into homes. Another reason is that suburban homes typically cost less, making living outside of cities a preferred choice for the young homebuyers.

Is it worth owning now vs. later?

A great scenario is when there are low interest rates and lower home prices. If you buy a starter home with a low rate and low home price, then you could potentially sell it for more than what you purchased it for down the road. But if you can’t sell your home for more, renting it out is also an option—turning that home into an investment property and potentially allowing it to pay for itself. This sort of investment (if you have the time and desire to stick to it) could turn out to be a great source of income for retirement. The ultimate downfall of a starter home, is that it’s not worth selling later down the road because of risk in losing out on money (due to it not being able to–at least–keep it’s value) or renting it out also isn’t an option because of low demand to rent where you purchased your home. So before you consider buying with hopes of renting it out later, it’s important to purchase your starter home with that sort of future for it in mind.

Learn the local housing market, renting market, what neighborhoods have more renters, etc. for the purpose of your investment, instead of purchasing a home based on your current personal preferences.

With many millennials starting to purchase outside of the cities, renting out may or may not be a possible future for the suburban starter home. Although the typical suburban home may be considered harder to rent out right now, it’s really about what’s nearby that’s potentially changing that and making it easier. What I mean is that millennials are indeed moving outside of the typical downtowns but not just to suburbs, they’re actually developing urbanized-suburbs (also referred to as urban-burbs), and are moving to those areas. Although it’s not a downtown, urban-burbs have started to show characteristics similar to urban centers, allowing millennials to own a home while also experiencing the same lifestyle they would have in a city—best of both worlds.

Saving for a forever home

Starter homes are not forever homes, therefore, you still have to put some preferences aside to ensure your investment is beneficial to you long-term. For some, renting is simply easier to deal with, and it’s possible to make a rental feel like your home with temporary solutions.

So if you’re patient and interested in saving up a few extra years for a forever home instead, then renting for now may be your best bet. But if you’re considering suburbs or urban-burbs, then owning can have more benefits. With the demand for urban-burbs increasing, you could likely sell and move-up later to your forever home.

It’s important to keep an eye out for lower rates and the general housing market when choosing to save for a forever home, just like you need to do for a starter home.

Sometimes when rates are too good to pass up, you have to decide quicker whether or not you keep saving up or go ahead and purchase a home that’s currently on the market. And waiting too long can result in missing a good opportunity to afford something that suits your family’s needs.

If home prices rise high enough, even for the down payment that you saved, you may not get that larger home, or the neighborhood you were interested in living in, either because it became too expensive or there’s just not enough homes on the market.

At the end of the day, to really know if you can afford a starter home or even a forever home earlier than you expected, it’s important to speak with a mortgage banker. They can also help guide you on the right path to homeownership in the near future if you’re not ready to purchase yet.