Burdened by student loans, poor job prospects and paltry paychecks, many millennials have had to put off buying homes.
Now some economists say that may turn out to be a blessing in disguise.
Young people might end up more financially stable and with more wealth in the long run if they delay home ownership until they have enough savings for a bigger down payment and investments outside of their home, argues Bill Emmons, senior economic adviser at the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis.
Because 20-somethings today are entering the workforce with more debt than previous generations, they should limit how much they borrow for their homes, says Emmons, who co-wrote an essay with Bryan Noeth, a lead policy analyst at the center, about how wealth-building varies by age, education level and race.
Millennials could learn a thing or two from Generation X workers, who were in their 20s and early 30s during the housing boom, Emmons says. Those consumers had an easier time getting mortgages than young people today, often with very little money down. But when the financial crisis hit and home prices plummeted, many of those new home owners found themselves with an overwhelming amount of debt and with very little cash on hand to help them ride out the downturn.
In contrast, older consumers who had assets and investments outside of their homes — along the lines of stocks and bonds — rebuilt their wealth more easily because financial markets rebounded more quickly than the housing market, Emmons says. Financial investments such as small businesses or investment portfolios can also have the potential for greater returns than what someone might see from owning real estate, he says.
The paper looked at how the debt levels and net worth for different age groups have changed over time. Young people today are carrying more debt than young people did 25 years ago. They also have lower levels of net worth, the report found.
For families headed by someone younger than 40, the median debt-to-assets ratio, which shows how their total debt compares to the total value of their assets, climbed to 44.9 percent in 2013 from 34.4 percent in 1989. (It peaked at 53 percent in 2010.) For middle-aged families, or those run by someone between the ages of 41 and 61, the ratio rose to 25.4 percent from 14.2 percent. But for older families, headed by someone age 62 and up, debt levels were pretty much unchanged.
What that shows, Emmons says, is that young people today are having a slightly harder time building wealth than young people did years ago. Older families were faring better even before the boom years and they did not suffer as much during the downturn. Middle-aged families took the biggest hit.
The point is not to expect young people today to be as prudent as older consumers, who have had more time to save money and diversify their investments, he says. But because they are entering the workforce with more debt than previous generations, young consumers should pause before adding to their debt loads and do as much as they can to establish healthy financial habits early on, he says.
To be sure, home ownership can still be a way for people to build wealth. Houses can act as a “forced savings” tool by requiring people to save a down payment and to build on those savings by making their mortgage payment each month, according to a report by the Joint Center for Housing Studies at Harvard University. Home owners often end up with a higher net worth than renters in the long run, studies show.
So go ahead, save for your down payment and buy that house. Just make sure you will have some extra cash in the bank — and some other assets in your name — before you make the plunge.