The stereotype of Millennials living in their parents’ basement into adulthood is no joke.  An unusually high number of young people in their prime home-buying years are postponing making their first purchase. There are many reasons for this, including availability, affordability, student loan debt and changing attitudes, but the solutions are not as easy to identify. One possible answer may be an approach to borrowing that can lower the down payment required for first-time homebuyers. 

Data analysis from a much-sourced Bank of America Merrill Lynch research note from June 2 indicates fewer Americans aged 24 to 35 are buying homes than ever before. According to the Federal Reserve of New York, homeownership rates among young consumers fell drastically in the wake of the Great Recession, dropping from 31% in 2004 (and 32% in 2007) to just 21% by 2016.

At the same time, the number of young consumers living with parents or elders has climbed dramatically. In 2004, just 33.5% of 23 and 25-year-olds lived with their parents or elder adults.  By 2015, that had grown to 44.9%.

With the housing market finally returning to a more normal state, some of these would-be homebuyers can be expected to leave the basement and get into their own homes. But so far the pace has been slow.  

While the recovery is a hopeful sign, accelerating home sales and the consequent increase in prices could be factors discouraging first-time buyers from entering the market. In 2016, U.S. house prices rose by 5.6%, faster than at any time since the housing crisis began and far outpacing the rate of inflation. And the price appreciation is widespread, with home values rising in 97 out the 100 largest metropolitan areas.  

But in the places where many Millennials want to live – dense cities on the East and West Coasts – prices for homes have increased by as much as 40% since 2000, much faster and higher than in other parts of the country.  According to the Joint Center for Housing Studies of Harvard University, the average home costs $575,000 in the 10 metro areas with the fastest appreciation rates, which is more than four times the average cost of a home in the 10 markets with the slowest rates.

Demand returning to the market is driving some of the increase, but so is dwindling supply with only 1.65 million existing homes for sale last year, the fewest in 16 years. Inventory is tight at the lower end of the market where Millennials would be expected to find their point of entry. 

That’s because fewer entry-level homes are being built. Between 2004 and 2015, completions of single-family homes under 1,800 square feet fell from nearly 500,000 units to just 136,000 according to the Harvard report. 

For many basement dwellers, renting is not an attractive alternative to buying. That’s because the national rental vacancy rate has been declining for seven straight years. It is now 6.9% nationally, the tightest it’s been in more than thirty years. For professionally managed apartments, the vacancy rate is just 4.4%. As a consequence, rents are rising across the country faster than the inflation rate. The portion of the Consumer Price Index focused on housing rents was up 3.8% in 2016.

Perhaps the most formidable obstacle for Millennial homebuyers is student loan debt. The Federal Reserve of New York estimates that a third of the shortfall of homeownership among 28-30 year olds is attributable to student debt. Today, the average 25-year-old carries 65% more school-related debt than graduates in 2003. And this debt load is crowding out other spending. People with student loans tend to have 36% less credit card debt. When it comes to housing, the New York Fed says there would be 360,000 Millennial-owned homes today had college tuition held steady at 2001 levels.      

And just in case high prices, lack of inventory, and crippling debt wasn’t discouraging enough, a recent survey by SunTrust Mortgage found that 42% of Millennials said their dog, or desire to have one, would influence their future home-buying decisions. Thirty-three percent of them said a dog was a more important factor in purchasing a first home than marriage or children. Only the desire for more space and the opportunity to build equity were more important than having room for a dog.

Unfortunately, it would be a lot easier to provide every Millennial with a free dog than it would be to raise the money needed to buy a home.  

According to RealtyTrac, it takes about 12.5 years on average to save for a 20% down payment. But consider how much home prices have recovered in just the past six years since the depths of the housing crisis. Between 2011 and 2017, median home values have increased by about 25%. 

But that’s just the national average. In places like San Francisco, the median price for a home has skyrocketed from $683,000 in 2011 to $1.2 million today; a rise of more than 75%.

Potential homebuyers standing on the sidelines while accumulating a full 20% down payment can be caught in an “appreciation trap” where they not only miss out on benefiting from this enormous appreciation, they also fall even further behind because the down payment amount would have soared as well.  

A handy equity appreciation calculator at AchieveTheDream.com can quantify the impact of waiting to save a larger down payment. For example, at a home price of $350,000 and an average appreciation rate of 4%, waiting just one year to buy can cost more than $47,000 in equity, three years can cost nearly $84,000 and five years can potentially have a six-figure impact at more than $122,000.

On the plus side, a Bank of America survey found that 40% of older Millennials say they’ve already started to plan for a down payment, compared with 35% of the general population. 

Millennials should know there is a smart and prudent way of getting a foothold in the market without waiting to save the full 20% down payment. Borrowers with a down payment of less than 20% are typically required to supplement their down payment with insurance. 

Private mortgage insurance can help reduce the down payment requirement for qualified borrowers to as low as 3%. Loan officers looking to help borrowers such as these with challenges like student loan debt can explore some of the solutions and advancements introduced into the market by checking out Radian’s web-based training video on demand, Timely Topics: Student Loan Solutions.

Private mortgage insurance can be a better deal than an FHA-insured mortgage.Particularly for borrowers with a good credit history, and in a rapidly appreciating market, an insured mortgage with a low down payment can be a convenient – and perhaps the only – point of entry for first-time buyer Millennials. Those buyers should also know that while they might need private mortgage insurance to get through the door of their first home, it goes away once the loan-to-value-ratio drops to 80% — another area where they can benefit from rapid price appreciation.   

The obstacles are high but those who trade a couch in the basement for a home of their own rarely regret the move. The Bank of America survey found that the overwhelming majority of first-home buyers were satisfied with their purchase. Also, 79% said their homes are having a positive impact on their long-term financial picture and 86% said that owning a home is more affordable than renting.

With the housing market finally recovering, this could be the best time to become a homeowner.  Fortunately, there are tools to help Millennials overcome the financial barriers they face and start building equity today.