Are younger Americans rejecting the homeowning dream?
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Perhaps sick of being told they could own a home if they only cut back on avocado toast, some US millennials are questioning the shibboleth of home ownership — and the financial model sold to successive generations that your home should be your main source of wealth.
In a viral post on social media platform X, Leandra Peters, under the handle @LPinFinance, broke down the argument for renting rather than buying: “My rent: $2,400. This is not the same as a $2,400 mortgage,” she wrote. “My rent is the maximum I’ll pay per month. A mortgage would be the minimum I’d pay per month.
“The current home I’m renting is valued at $1.1mn. Let’s do some maths: buying this same home at 6.8 per cent interest over a 30-year fixed term would give me a mortgage payment of $7,171. Homeowner’s insurance: $104 property taxes: $688 HOA: $414 . . . I’d be at $8,377 per month. I think I’ll stick to renting.”
Property taxes in most US states are between 0.75 per cent and 1.75 per cent. HOA are fees payable to a homeowners’ association, which sets rules for a residential community.
Peters clarifies: “I still have assets . . . I invest in the stock market. The stock market doesn’t require me to deal with tenants, toilets and termites. I don’t look at a primary home as an investment.”
Her thread on X has been viewed more than 20.4mn times so far and received some robust responses. However, she is one in a growing chorus of young women who are advocating taking a hard look at the numbers.
US-based financial podcaster and writer Katie Gatti Tassin reached the same conclusion when she started looking to buy in Dallas: “The American dream is to buy a home, it’s considered the pinnacle of making it.” But when she looked closely at the numbers, homeowning didn’t stack up for her.
“Real life did not match the narrative I’d been told about how owning is better than renting,” Tassin says, whose Money with Katie blog, podcast and newsletter was acquired by Insider Inc’s Morning Brew in 2022. The houses she could buy on her budget were far inferior to those she could rent at the same monthly price. She says millennials who choose to buy face spending “three times as much to live in a worse place”: moving from an urban centre to the suburbs where they lose their networks and burn through disposable income to the point they can no longer travel or go out.
“The crux of the problem — that the prices of homes coupled with the cost of borrowing money far exceed the rental market prices,” Tassin says.
She highlights the hidden “unrecoverable” costs of home ownership: the expense of closing the sale, insurance, property taxes and mortgage interest payments alongside expensive maintenance work. As a renter, Tassin points out, when her drains clog, pipes burst, septic system breaks or boiler needs replacing, her landlord has to deal with it. As a homeowner, she would be opening her wallet.
Tassin breaks down an example of buying a $500,000 house, with a $100,000 deposit and $400,000 mortgage that you own for 13 years — the average time a homeowner stayed in one property as of 2021, according to Redfin”. US fixed-rate mortgages tend to be fixed for the full term, unlike the two or five-year terms that are typical of fixed-rate mortgages in the UK.
The biggest false economy to Tassin’s mind is mortgage payments. Assuming the typical US 30-year fixed rate mortgage at 5.65 per cent, she calculated that $2,309 a month on the mortgage after 13 years would total $360,195 (with rounding). But, she notes, $262,491 of this has gone on bank interest. As a result, only $97,704 of the original $400,000 loan has been repaid.
In addition there is an average of $1,217 of extra monthly costs in property tax at 1 per cent of property value, insurance estimated at about 0.6 per cent and maintenance at 1 per cent of house value, says Tassin. In effect, you have handed over $650,136 for the property after 13 years, only $197,704 of which went towards building equity — the principal repayments and the original $100,000 deposit. Because US mortgages tend not to be portable, the remainder of the loan, just over $300,000, would need to be paid off as well at the 13-year mark, as a new property means taking out a new mortgage.
On the other hand, there is an alternative calculation to be made about the cost of renting a similar property for 13 years.
Jessica Lautz, deputy chief economist and vice-president of research at the National Association of Realtors, would expect house price rises to keep pace with the extra expenses of ownership. In most markets, “after holding on to one’s home for 10 years, which is the typical tenure in home, homeowners gained 97.8 per cent in value from May 2014 to May 2024,” she says. “After 13 years, homeowners gained 147.7 per cent in value of their home.” S&P annualised stock market returns since 2011 have been more than 10 per cent.
Over the decades banks have pushed mortgages, supported by successive governments, and earned plenty for the lenders. House prices have climbed, but so too have mortgage interest rates. Tassin used the rate of 5.65 per cent that she found on Bankrate as the average 30-year fixed mortgage rate when she ran her numbers in summer 2022. The current equivalent is about 7 per cent. A recent survey commissioned by Redfin also found a “nepo” housing market in which 36 per cent of Gen Z and millennial homebuyers in the US expect to turn to the “bank of mom and dad” to support sales.
Although millennials are still very much buying property — by the end of 2022 more than half the generation were homeowners, according to Apartment List — the research also found that many would keep renting. Its 2022 survey found nearly a quarter of the generation, which it defines as those born between 1981 and 1996, plan to “always rent”, citing reasons both negative and positive, from unaffordability of mortgages to flexibility of lifestyle and lack of extra costs. That is up from 13.3 per cent saying they would always rent in 2018.
Tassin is not surprised this age group is examining renting over buying. Not just because home ownership was more affordable for previous generations but, critically, millennials now have other opportunities to invest. “Buying a home was the easiest way you could build equity in something and the US government really incentivised home ownership,” she says. “Now millennials and Gen Z, as digital natives, have cheap if not free access to public markets on supercomputers in our pockets.”
She has a portfolio of diversified, low-cost index funds. “It’s not just that you’re renting for less money, it’s that you are taking the money you would have spent and you’re putting that in a different asset class that is in many ways safer and cheaper.”
She knows there is no persuading most people. “In the US, real estate really is religion — there is no amount of maths you can show them that will change their mind.” But to her the homeowning narrative “no longer really makes sense — people are starting to think with more of an analytical eye rather than as a foregone conclusion”.
Kristy Shen, a former software engineer turned co-author of Quit Like a Millionaire, funds her nomadic “retirement” by living off her investment portfolio. She regards a big mortgage as a huge gamble. “A house is illiquid, unlike stocks. As a result, it’s harder to take advantage of new job opportunities in other cities,” she says. “And it’s difficult to get out of during housing downturns.” She reiterates Tassin’s message: “The key is to rent and invest instead of buying a house.”
Shen believes a shift is happening among millennials who have to “adapt to a new reality” rather than following the outdated advice of their parents to get a degree, a job, a pension and a house. It may be well-intended, she says, but doesn’t apply in an era of tech-related job insecurity.
However, she adds, millennials “have tailwinds too. Like the ability to work remotely, travel cheaply using frequent-flyer miles and hotel points, and geographic arbitrage.”
Does Tassin find it curious that the prominent voices grabbing attention on this subject are women? “I think women are more willing to question whether property ownership is the right path,” she says. “There has been a sea-change in the last decade of financial literacy among women. With that comes questioning of conventional wisdom.
“Millennial and Gen Z women, who watched their mums in the 1990s be their primary caretaker and work full-time — and try to have it all — are now taking a closer eye to how they can maintain their financial independence, especially after motherhood,” Tassin says. “As we’re staying single longer and waiting to have kids it makes sense that home purchase is also up for further scrutiny.
“It also doesn’t help that, in the event of divorce in the US, women are more likely to get the house . . . that they can’t afford on their own. This leaves many women in a worse financial position than if they had instead focused on investing in low-maintenance retirement assets and developing income of her own.”
Peters received polarised responses to her X thread. “A significant portion of the feedback was dismissive,” she says, “with some individuals discrediting my perspective solely based on my gender.” But she found many former homeowners agreed that renting better suited their circumstances.
“Some commenters drew comparisons between buying a home today and their own purchases from 23 years ago. It’s a bit like trying to use a floppy disk to store data from the cloud — the principles might be similar but the execution is worlds apart.”
The NAR’s Lautz accepts investments have played a part. “Granted, this year’s home buyers were more likely to use financial assets such as stocks for their downpayment, so the stock market can be a path to home ownership as well,” she says, but adds that the NAR reported an all-time high in median home prices last month. “In this scenario, homeowners are the winners. Last quarter, 90 per cent of metro markets had home price gains, and 30 per cent of metro markets had double-digit price gains from last year.”
And housing remains a long-term wealth repository, she says. “The Federal Reserve reports that homeowners have nearly $400,000 in wealth, while renters have just over $10,000. Homeowners overall in the US have 40 times the wealth of renters.”
Tassin concedes that rents will rise over time. However, “the prices of homes coupled with the cost of borrowing money far exceed the rental market prices in roughly 70 per cent of the US right now”.
Peters admits she hasn’t given up on having her own home. “On an emotional level, I’ve always been drawn to the idea of home ownership,” she says, but is waiting for “when the numbers align for me”.
Shen now lives in Toronto, Canada, following her own 150 rule — taking the monthly mortgage and multiplying it by 1.5. “If that’s less than monthly rent, buy. Otherwise, rent. Don’t follow the herd or your feelings. Follow the maths.”
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