Homeownership has long been a cornerstone of the American Dream. But stagnant wages and rising real estate prices are making homeownership less attainable, especially for millennial families.
“Student debt, rent burden and tight housing supply are the top contributing factors to the affordability crisis,” explains Archana Pradhan, a senior economist at CoreLogic. According to Pew Research, millennials are less likely to own a home than previous generations at the same age.
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Fortunately, options still exist for young families looking to settle down. Some locations, especially in the Midwest and Texas, offer more affordable housing as a result of higher wages and/or lower home prices. “These areas have both affordable housing and good economic conditions,” according to Pradhan.
Additionally, a recent report from CoreLogic shows that millennials are applying for mortgages near major hubs, but in neighboring states with lower home prices. For instance, Pradhan says, “Millennial applicants from New York applied for home-purchase mortgages mostly in New Jersey and Pennsylvania, and applicants from California applied for mortgages in Nevada.”
Since millennials now comprise a majority of new parents in the U.S., the next wave of popular cities will be determined in part by where they choose to raise their families.
To help millennials understand how much home they can afford, researchers at Fabric, a company creating financial products for families, analyzed data for the 240 largest metropolitan areas. These areas were grouped by population into large, midsize and small metros.
Fabric calculated the average millennial income for each metropolitan area, using data from the U.S. Census Bureau. Based on that, its researchers then determined the most expensive home a typical millennial could afford, assuming they spend no more than 28 percent of their gross monthly income on housing.
Finally, Fabric compared that number to the median Zillow Home Value Index for each metro as a measure of affordability. Here’s what Fabric found.
How Millennial Income Varies Across the Country
Across the entire U.S., millennials who work full-time make an average $43,913 per year. But this amount ranges widely by location. For example, millennials in Homosassa Springs, FL make an average of $26,225 per year. By contrast, millennials in the tech capital of San Jose, CA make an average of $75,644 per year—nearly three times as much.
In general, metropolitan areas on the East Coast and West Coast boast higher salaries, while those in the South and Southwest report lower amounts.
How Income Relates to Home Affordability
As a general personal finance rule of thumb, it’s best if housing costs don’t exceed 28 percent of household income. Based on this rule, the average millennial could afford to buy a home that costs up to $260,678, given an average annual income of almost $44,000. (This assumes a 30-year fixed mortgage with a 20 percent down payment at today’s interest rates.)
Good news: That is approximately 16 percent higher than the current $225,300 median home value in the U.S.
As with income, home prices and affordability vary widely across the country. Although incomes tend to be higher in coastal cities, home prices often outpace income gains, especially in California.
Despite offering above-average incomes, the San Jose, Los Angeles and San Francisco metropolitan areas are still some of the least affordable. Small Southwest cities such as Santa Fe and Flagstaff also put homeownership out of reach for many millennials.
Conversely, metropolitan areas in states such as Texas, Ohio, Alabama and Pennsylvania are much friendlier for millennials looking to buy homes. For example, Pittsburgh, Cleveland and Toledo offer affordable options for young families.
Millennials Own Homes at a Lower Rate
The national homeownership rate for millennial households is 38.1 percent, compared to 63.9 percent for all households. Not surprisingly, geographic variance in affordability translate into significant differences in homeownership.
Census and Zillow data show a statistically significant correlation between affordability and homeownership among millennials. In parts of the Midwest, more affordable options translate into higher homeownership. On the other hand, homeownership is out of reach for many young families in coastal areas.
One interesting exception is that popular areas in Utah (like Salt Lake City, Provo-Orem and Ogden-Clearfield) are “too expensive” for millennial buyers according to our rules of thumb, yet still boast high millennial homeownership rates. We can’t say definitively why that is, but speculate that these millennials might receive assistance from family, or simply spend a higher percentage of their income on housing.
Home Affordability Varies in the Most Popular Metros for Millennials
Check out the full list of large metros ordered by the percentage of the population that are millennials here.
This article originally appeared on Fabric.
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