The American Dream of owning your own home is becoming more distant for many millennials. From 2006 to 2011, consumers between the ages of 25 and 34 experienced the largest decline in homeownership of any age group, according to Census Bureau data.
What is causing this change, and what can millennials do to prepare themselves for homeownership? First, there are a few clear reasons why this younger generation may be losing ground in the homeownership game: creditworthiness, debt and urbanization.
Reason #1: Creditworthiness
According to Credit Karma data, U.S. consumers between the ages of 18 and 34 have an average credit score of 624.* For most conventional home loans, the minimum credit score requirement is 620. Digging further into the data, we find that only 49 percent of millennials have a credit score above that minimum.
For those who do meet the minimum score, they'll end up paying a great deal more in interest than those who have scores above 720, which is traditionally considered the threshold to get the best rates and terms on loans. Even just a percentage point difference in interest rates can mean thousands of dollars in savings over the lifetime of a home loan.
Reason #2: Debt
For those millennials who do meet the minimum credit score requirements, there's the looming shadow of new debt. Consumers between the ages of 18 and 34 with student loan debt have on average about $27,500. They're also saddled with approximately $3,400 in credit card debt.
For most consumers, a home loan is the largest debt load they'll ever take on at once, so it's no wonder many millennials are opting to rent or even move home with Mom and Dad instead. Adding several hundreds of thousands of dollars in debt to their already accrued $30,000 is a lot to stomach.
Reason #3: Urbanization
Younger millennials -- those in their late teens and twenties -- are migrating to urban centers, preferring them to the typically more affordable suburban streets of their youths. Once they're ready to settle down in the urban outskirts or suburbs, they've dealt with years of paying for costly rent and other city commodities, which could be another aspect stunting their homeownership ability.
How to Build Your Credit for a Home Loan
But all is not lost. No matter what your age, there's a lot you can do to get in homeownership shape. Here are a few steps to get you started:
Check your credit score. The first step is to know where you stand. Use a site like Credit Karma to check your credit score for free.
Keep track of the factors affecting your score. There are six main factors to keep an eye on:
- Credit card utilization: This rate shows how much of your credit limits you're using. Typically, the lower this rate, the better.
- Payment history: This represents how many of your bill payments you've made on time. The closer this rate is to 100 percent, the better off your score will be.
- Derogatory marks: These include items like accounts in collections, bankruptcies, civil judgments and liens. They can cause significant damage to your credit score.
- Length of credit history: When it comes to credit scores, the past predicts the future. Having a lengthy credit history of on-time bill payments shows that you'll probably continue to be a responsible borrower.
- Total accounts: Similar to the length of your credit history, the more accounts you have in good standing, the better. Of course, that doesn't mean you should open more accounts just for the sake of adding to your total.
- Credit inquiries: Each time you apply for credit, it initiates a hard inquiry. Too many hard inquiries can signal to potential borrowers that you may be desperate for credit.
Assess your debt situation. You don't have to be debt-free to buy a home, but finding out how long it may take you to pay back your debt could give you some perspective. Use a debt repayment calculator to find out how long it will take you to pay off your debt and how much interest you will have paid toward the debt. If you want to accelerate your debt repayment, consider paying more toward your minimum monthly payments.
Get an emergency savings fund. No one knows what the future holds, no matter how secure your income. Try working toward a savings of six to 12 months of living expenses a little bit at a time. Make sure your fund is not too easily accessible, but that you can get to your money in a real emergency. Once you're a homeowner, you'll have this little rainy day fund set aside for your mortgage payments, in case of an emergency.
Young adults may not be becoming homeowners as early as they used to, but who's to say that it isn't a shift for the better? Times have changed, and perhaps so should our perception of the American Dream.
What do you think?
About the author: Bethy Hardeman writes on credit, personal finance and the economy for CreditKarma.com, a free credit management website that helps more than 25 million people access their credit score for free. Find her on Google Plus and Twitter.
*Based on a sample size of 1,057,156 Credit Karma members who pulled their credit data in 2014.
Building permits/total housing units: 0.15% Decline in building permits 2005-2011: -60.29% (11th smallest) Building permits 2011 YTD: 8,136 Total housing units: 5,567,315 At the beginning of 2011, a number of new, restrictive building codes went into effect in Pennsylvania. This caused a rush among builders to secure permits, with housing permits increasing a massive 117.8% between November and December 2010, according to the Philadelphia Federal Reserve. The state's housing market has not been doing well since. Permits issued from January to June 2011 fell 16% compared to the same six-month period one year earlier. The national average for permits issued in the first six months of 2011 compared to the first six months of 2011 is a decrease of 6%. Read more at 24/7 Wall St.
Building permits/total housing units: 0.14% Decline in building permits 2005-2011: Building permits 2011 YTD: -77.09% (11th largest) Total housing units: 721,830 Maine has seen one of the largest decreases in building permits in the past six years. This is unsurprising as home sales in general declined substantially. Home sales for June 2011 decreased 21.39% from June 2010, according to the Maine Association of Realtors. The state's median sales price also decreased 1.37% over this same period. According to numbers from the Census Bureau, Maine has the highest vacancy rate in the country, reaching 22.8% in 2010. However, this number also includes empty vacation houses. Read more at 24/7 Wall St.
Building permits/total housing units: 0.14% Decline in building permits 2005-2011: -61.85% (12th smallest) Building permits 2011 YTD: 11,033 Total housing units: 8,108,103 New York State's housing market is among the largest in the country. As a result, the number of permits is minuscule when compared to the state's total housing units. Although new home sales decreased in the first half of 2011 from 2010, the number of permits actually increased slightly during that period, from 10,189 in 2010. This is significantly lower than 2005's 28,921 permits. Read more at 24/7 Wall St.
Building permits/total housing units: 0.12% Decline in building permits 2005-2011: 69.55% (24th smallest) Building permits 2011 YTD: 3,402 Total housing units: 2,808,254 Despite having a healthy economy compared to much of the country, Massachusetts' housing market is beginning to face serious troubles. In June 2011, sales of single-family homes in the state decreased 23.5% from the year before, reaching the lowest level since 1991, according to the Warren Group, a New England real estate research firm. With so few home sales, it follows that not many new homes are being built. Year-to-date, building permits for 2011 are about one quarter of what they were in 2005. Read more at 24/7 Wall St.
Building permits/total housing units: 0.12% Decline in building permits 2005-2011: -76.61% (12th largest) Building permits 2011 YTD: 6,184 Total housing units: 5,127,508 Ohio has suffered, and continues to suffer, greatly from the housing crisis. Over 8,000 homes were foreclosed in July 2011, the ninth-largest amount in the country, according to real estate company RealtyTrac. With such a high foreclosure rate, currently at one in every 608 housing units, housing is already too inexpensive for people to want to build. Ohio has therefore had one of the greatest decreases in building permits in the country over the past six years. Median existing home sales are also down in many areas of the state, according to data from the National Association of Realtors. In Toledo, prices are down 17% from one year ago, the third largest rate in the country. Read more at 24/7 Wall St.
Building permits/total housing units: 0.09% Decline in building permits 2005-2011: -74.06% (14th largest) Building permits 2011 YTD: 1,403 Total housing units: 1,487,891 Connecticut has had one of the greatest declines in the number of new building permits in the country. This trend saw a small turnaround in June -- the first monthly year-over-year gain in 2011 in new construction, according to the Connecticut Department of Economic and Community Development. However, the Hartford Courant reports that for "the first six months of the year, residential construction was down 30 percent compared with the same period in 2010." June was also the first increase in home construction in five years. Read more at 24/7 Wall St.
Building permits/total housing units: 0.09 Decline in building permits 2005-2011: -82.19% (7th largest) Building permits 2011 YTD: 4,250 Total housing units: 4,532,233 Michigan is one of the states that has suffered the most from the recession. The state's unemployment rate peaked around 15% in 2010. It is now at 10.5%, which is still significantly higher than the national average of 9.2%. The state has a vacancy rate of just under 15%, which is one of the highest in the country. New building permits have also decreased by over 80% since 2005, also one of the highest rates in the country. The state may now be more focused on tearing down old buildings than building new ones. Read more at 24/7 Wall St.
Building permits/total housing units: 0.09% Decline in building permits 2005-2011: -84.18% (3rd largest) Building permits 2011 YTD: 4,897 Total housing units: 5,296,715 Illinois has seen an almost 85% decrease in new housing permits since 2005. This is the third largest drop in the country. There are a number of initiatives being made across the state to improve the housing markets. In Chicago, for instance, Mayor Emanuel has made a number of changes to increase the speed with which building permits are issued. Additionally, a "Micro-Market Recovery Program" has been introduced to slow the city's foreclosure rate. Read more at 24/7 Wall St.
Building permits/total housing units: 0.09% Decline in building permits 2005-2011: -72.71% (17th largest) Building permits 2011 YTD: 774 Total housing units: 881,917 West Virginia's decline in building permits has slowed to almost a crawl. In the first six months of 2005 the state issued almost 3,000 permits. For the first half of 2011, that amount decreased to 774. If every permit were to result in a new housing structure, those homes would represent less than 0.1% of the total housing units in the state. Despite all this, construction is one area that is benefiting the state. According to the organization WorkForce West Virginia, 700 construction jobs were added in-state this past July -- the largest amount of jobs added in the private sector. Read more at 24/7 Wall St.
Building permits/total housing units: 0.07% Decline in building permits 2005-2011: -70.81% (22nd largest) Building permits 2011 YTD: 312 Total housing units: 463,388 Foreclosure filings increased 4% in Rhode Island from the first six months of 2010 to the first six months of 2011, according to RealtyTrac. Foreclosures dropped by 29% for that same period on the national level. Rhode Island home sales decreased 20% from one year ago in the second-quarter, according to the Rhode Island Association of Realtors. Additionally, median home prices have dropped 2%. These numbers indicate that Rhode Island's housing market is not recovering at the same pace as the majority of the country. For this first six months of this year, the state has issued a mere 312 building permits, the smallest number in the country. Read more at 24/7 Wall St.
Follow Bethy Hardeman on Twitter: www.twitter.com/@bhardeman