An Economist’s Letter to Millennials Who Can’t (Yet) Buy a Home

Dear Millennials,

Early this summer I wrote my first letter to your cohort, specifically to those of you who were in a position to buy a home this year. That’s about 2% of you—and in many economic respects, you are the lucky ones.

This letter goes out to those of you who are not so lucky. Not yet, anyway.

I had the honor of speaking to a bunch of you at George Washington University with HUD Secretary Julián Castro on Monday at a town-hall event where we heard from you about your concerns and worries about housing (via social media, natch).

Your generation, born between 1981 and 2000, is our country’s largest and holds the most potential. I voraciously read every study and survey about you (related to housing, that is), and they all say the same thing: You believe in homeownership and its role in building wealth for the middle class.


Right now you are having a hard time seeing a path to get there any time soon, because you face several economic challenges.

Smart leaders such as Castro are focused on you and resolving those challenges. But here’s what you can do.

You are worried about your debt, especially student loan debt

Debt messes up your home-buying prospects in lots of ways.

Your debt payments factor into your debt-to-income ratio. In order to get a qualified mortgage, you need a DTI of no more than 43%, so a very large student loan balance could disqualify you right off the bat.

Ideally, you need to limit your total debt payments for student loans, credit cards, and auto loans to less than 15% of your income. More than that will limit your options and your ability to qualify.

I know that’s a little hard to pull off now that you’ve already racked up all that student loan debt. Use that youthful energy and press our elected leaders to help you find ways to lower those payments. Lower rates could make a huge difference in your monthly payments.

Your debt burden also puts a limit on the amount of mortgage debt that you can handle. Your peers who have successfully qualified for a mortgage this year were able to manage their debts—the average DTI for millennials is 36%. You do this by avoiding new debts and choosing more affordable homes.

You are worried about your credit score

The average FICO score for a millennial with a mortgage this year is 714. The average FICO for all Americans is 695. The average FICO for a millennial with an FHA mortgage is 682. That’s just what it takes these days.

The old-fashioned methods of calculating a credit score don’t work in your favor, as they favor a lengthy credit history (which you often don’t have) and ignore payments you’ve responsibly made each month for rent, cellphone bills, and utilities. We can’t change the system overnight, so work to get your traditional credit score as high as you can.

A score of 750 will bring you the best rates. Less than 650 will dramatically lower your odds of getting approved and will also saddle you with a higher interest rate, which makes your payment and your DTI higher.

You have no savings for a down payment

For those who already have a good credit score and can qualify for a mortgage, the top impediment becomes that big down payment. But here’s a reality check: You don’t need to put 20% down.

While 20% is ideal—it will get you the best rate, a much lower payment from a lower rate, no mortgage insurance, and the highest odds of getting approved—20% of a home is a lot of money. When I bought my first home 20 years ago, I could put only 10% down.

The average millennial this year could put only 7% down, but at least they could get a home with that. Shoot for 10%, as that level will get you a better mortgage rate. But keep in mind that you can do as little as 3% on a conforming mortgage and even 0% if you are a veteran. Also, look into the availability of local down-payment assistance programs.

No matter what, you need to be saving as much as you can. You need a down payment, but you also need an emergency fund to keep any surprises from wrecking your credit.

You are angry and worried about ever-increasing rents

Rents are already high. The majority of renters in the U.S. now have to spend more than 30% of their income to rent a typical home, and that means they’re starting to sacrifice spending in other areas such as food and health care. Needless to say, this scenario doesn’t help you save—and you’re not building a credit history, either.

But with a shortage of new housing units in the works, the situation will only get worse. How can you deal? Likely in the way you already are. Double up or triple up. Settle for a smaller place. Spend a season with Mom and Dad. Or, vote with your feet and consider areas that are affordable.

Finally, I’d like to close this letter with a response to Kylie Roe-Harrison, who wrote this on our Facebook page: “The world around us is not ready to believe in mature young adults.”

Kylie, the world may seem to be against you because of the challenges I discussed above, but I and leaders like Secretary Castro get how important you are. And beyond your importance, we do care about your success. Therefore, your challenges are our challenges.


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