The Three Little Pigs Should Have Rented

When it comes down to it, regardless of how it came about, Millennials frequently aren’t able to buy homes due to a lack of funds, and the smartest thing that many can do is limit the amount of additional debt they take on and avoid becoming house poor.

The conventional wisdom on homeownership goes a little something like this: Homeowners have equity and an asset that will appreciate in value, so everyone should buy a house as soon as possible because renters are throwing their money away. But…well-intended as it may be, is that still true? For young people, it looks like the answer is no. Though that may seem shocking, for Millennials (those born between 1981 and 1996), counter-intuitive advice has long since become the norm, and here’s why.

First, young people are more likely to have to move for work, work in lower-paying jobs, and carry student loan debt. Therefore any home that they may be able to afford may have drawbacks like living so far out from amenities that they lose out tax benefit of buying as they shell out for a car, insurance, and gas money while simultaneously losing the conveniences of nearby resources that are found in more urban and populated areas where they’re likely to work. Homeowners are often buying for equity or tax benefits, but with the typical Millennial debt-to-income ratio, many may only qualify for a condo that won't appreciate, high interest rates, or face other housing-related financial challenges that renders related tax write offs a mere pittance.

Additionally, Millennials are more likely to marry and have children later in life than previous generations. According to a study by the Pew Research Center in 2019, 55% of Millennials live with a spouse and/or children compared to older generations at the same time in their lives; “66% of Gen Xers in 2003, 69% of Boomers in 1987 and 85% of members of the Silent Generation in 1968,” and while 12% live with an unmarried partner, the lack of a long-lasting dual-income household is one of the factors contributing to the generational tendency to rent, and live in “doubled up” shared living arrangements. [1] [2]

Speaking of which, single-income woes aren’t the only financial trouble millennials face. Many young adults haven’t lived any part of their adult life debt-free; currently 44.7 million Americans are now saddled with $1.71 trillion in student debt alone, and 69% of the class of 2019 took out student loans averaging $29,900 per student.[3] While a monthly mortgage payment may be similar to monthly rent prices, paying off student debt in addition to rent, utilities, and basic necessities (possibly including a car, insurance, etc.) leaves little room for Millennials, especially in single-income households, to save up for a down payment—not to mention pay for inspections, closing costs, renovations, maintenance, and repairs.

When it comes down to it, regardless of how it came about, Millennials frequently aren’t able to buy homes due to a lack of funds, and the smartest thing that many can do is limit the amount of additional debt they take on and avoid becoming house poor.[4] Though it seems counterintuitive, it comes down to the fact that when the Big Bad Wolf blows down your house (or more likely, the boiler needs to be replaced or the leaky roof requires repairs), it’s often better for Millennials when those sudden expenses are someone else’s problem.

Regarding personal finance and long-term investments, plan sponsors will have to adapt to this new reality and adjust their approach to the younger generation. Many Millennials aren’t saving for retirement and tend to be risk-adverse, so sponsors may pivot to extolling the virtues of 401(k)s, compounding interest, as well as basic emergency funds. For those who are pursuing the American Dream of home ownership, providing opportunities to learn about the risks and benefits thereof, as well as hidden costs, budgeting, and mortgage basics can help ensure that these employees are at least armed with the knowledge necessary to help them make well-educated choices. And for those on the fence who aren’t sure what decision is right for them, sponsors can help them make that decision too. The only thing consistent is change, and Millennials certainly have had more than their fair share, so when conventional wisdom may fail, sponsors can help fill in that gap and help employees make whatever decision is right for them.





These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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