Mortgage lenders tend to be overly optimistic about the housing market – and who can blame them?
Typically, when economists working in the mortgage industry measure affordability, they use two main metrics: mortgage rates and home prices. In this current market, both are very favorable. Mortgage rates dropped in February and March and have been basically flat headed into the spring home buying season. Meanwhile, home price appreciation is moderating, and some markets are now starting to see home prices drop.
Economists also take into account the larger, macro-economic factors such as unemployment and wage growth. There again, both are favorable: Unemployment is now at pre-crisis lows and wages have been creeping up steadily.
All of this bodes well for home buyers – particularly millennials, who represent that largest home buyer cohort.
And yet, even with all these elements coming together nicely, pending and existing-home sales so far this year just haven’t been what was expected. Even though millennials represent an increasing share of home sales, they’re just not buying homes at the same rate as previous generations.
So why is that?
What economists and housing experts often overlook – or purposely leave out of the equation – is the total cost of homeownership, which has been on a steep incline for the past ten years. A recent study from Clever Real Estate, “The True Cost of Homeownership: Expectation vs. Reality,” reveals that the average homeowner currently spends around $2,676 on maintenance and repairs, $6,649 on home improvements, $2,600 on property taxes and $1,228 on homeowners insurance per year.
As it turns out, this is what millennials fear most: That they’ll buy a home a suddenly be whacked with a slew of unforeseen costs, such as a new home heating system, new roof, drainage repairs – or even a sharp tax increase. The ugly truth is, even though homeownership is more affordable than ever, when looking just at factors like mortgage rates and home prices, the cost of repairs and maintenance has gone though the roof (pun intended).
Thus, a true cost analysis of homeownership should include all the variables, such as repairs, renovations, HOA fees, landscaping, garbage service, utilities and local taxes.
Clever Real Estate’s study, however, goes beyond just the basic expenses associated with homeownership. It dives deep into Americans’ general feelings about owning and home and considers things such as homeowner savings, time investments and renovation projects, as well as local property taxes and insurance.
The study reveals that although purchasing a home is perhaps more affordable than ever, the costs associated with homeownership continue to rise and – perhaps most importantly – many millennials don’t have enough “buffer” in their savings to absorb large, unexpected expenses, such as an oil burner failure.
This lack of buffer is sometimes obvious right from the start, when looking at the size of the downpayment millennials are putting toward home purchases. Clever’s research shows that 67% of millennials put less than 20% down, leading to higher mortgage payments.
The study additionally finds that 59% of homeowners making renovations are using some combination of credit cards, personal loans, and home equity loans to fund their projects.
What’s more, one in four homeowners has less than $500 saved for home repairs.
The study shows that millennials are planning almost 50% more renovations than Baby Boomers, but these projects are causing them more stress and surprises than any other generation.
They’re also three times as likely to use a personal loan, and twice as likely to use a credit card to finance those renovations.
As per the survey, 43% of millennials were surprised by the cost of maintaining their homes. No doubt, many have expressed fears and concerns to their peers regarding the unexpected costs associated with owning a single-family home. A related study, “Millennial Homeowners: More Renovations, More Debt, More Stress,” shows that millennials are twice as stressed about the total cost of homeownership than Baby Boomers.
Despite the fact that homeownership is more expensive than it used to be, most homeowners duo not regret their decision to buy. As per the study, 65% of respondents said they’ve never felt home buyer’s remorse and only 19% reported feeling stressed or anxious about owning a home.
The majority of respondents felt happiness, comfort, security, and a sense of pride.
To view the full study on total cost of ownership, including additional charts and graphs, click here.