It could take up to nine months for an average millennial to recoup one month's expenses taken out of their hard-earned downpayment savings, a new study says.
The economic hardships faced by prospective homebuyers, including millennials, because of the coronavirus pandemic force them to use their down payment savings just to cover daily expenses. This situation makes it harder for millennials to buy their dream home sooner and may even delay it by years, the Realtor.com report says.
The Millennials' share of the total home purchase loan originations has grown to 53 percent from 49 percent during the same period last year despite millennial homeownership rate still being low at 43 percent compared to the 65 percent overall rate.
Many of these millennials who are currently renting are saving up for a downpayment, which could be around $32,000 or 10 percent of the April median listing price of $320,000. However, given the economic uncertainties brought by the global health crisis, prospective home buyers are left with no choice but to dig into their downpayment savings for their everyday expenses.
Depending on the location, rental expenses can eat into their savings so much that recouping a month's expenses can take months. If this situation continues for six months, an average millennial can take over four years to regain the downpayment savings they have lost, the Realtor.com's analysis said.
Stricter lending criteria
Another hurdle to overcome for first-time homebuyers is the tightening of lending criteria by some lenders, including the requirement for a higher credit score and a higher minimum downpayment on certain loan types.
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Some banks, for example, are requiring a 20 percent downpayment compared to typical millennial downpayment of about 8 percent last April. That equates to about $64,000 downpayment based on a median listing price of $320,000, which makes it harder for first-time homebuyers to produce.
While that estimate will vary depending on the location, the analysis shows that an additional 10 percent to a downpayment would, on average, extend the needed time to save up by 6.5 years.
Eight to 10 months of downpayment savings for one month's expenses
It can take up to 10 months of monthly savings to recoup from a single month's expenses, based on the 593 counties studied. San Francisco, CA, topped the list of 10 markets where it takes the longest to recoup. Following San Francisco are Williamson, Tenn. - Nashville; King, Wash. - Seattle; Douglas, Colo. - Denver; Forsyth, Ga. - Atlanta; Ascension Parish, La. -New Orleans; Shelby, Ala. - Birmingham; Howard, Md. - Baltimore; Midland, Texas; and Pulaski, Ark. - Little Rock.
Potential homebuyers in these markets also face other challenges apart from living expenses, particularly the listing prices, which tend to be higher than the national average. Eight of these ten markets had a median listing price higher than April's median of $320,000.
Meanwhile, the Buyers' markets where it takes the shortest time to recoup savings include Terrebonne Parish, LA; Kaufman, TX; Calhoun, AL; Pinal, AZ; Baltimore, MD; Richland, SC; St. Louis City, MO; Sangamon, IL; Broward, FL; and Kanawha, WV.
More on the Realtor.com report can be found here.