Anyone that has been paying attention the past couple years knows that the has been a Great Recession which has had a highly variable recovery. By “highly variable” we mean that real salaries have been shrinking versus inflation and nobody is quite sure how things will be affected when the Affordable Care Act is fully implemented couple that with unemployment that is still somewhere around 7.4%.
So what prompts this particular rant? Articles such as the following:
Which, of course, leads to such comments as the following by Christopher Mims:
Millennials are holding back the housing recovery. Is there anything they can’t mess up?
Umm, yeah, if people can’t afford to buy a house because real salaries have been going down, unemployment is high, and don’t forget those student loans that need to be serviced, clearly they must be screwing something up.
Now don’t get me wrong, it’s not exactly a secret that members of the Generation Y cohort are living at home with their parents for longer than other generations a lot of us are also graduated from college straight into a recession or a weak job market at best. For that matter, I worked to pay for my Bachelors degree and was a contractor when I finished, going into the recession I was glad to be offered a full time position… with a 20% pay cut.
The housing market is all over the place, but there appears to be a US national average of $152,000 and the 2011 Massachusetts average of $319,900 seems to be pretty accurate based upon my recent experiences when looking for a house to buy. You can find homes for less, but they either need work or are likely to be a bit of a commute to get to work.So lets be generous and use the national average of $152,000 for a hypothetical scenario.
Based upon government statistics the average income for males with a Bachelors degree in 2010 was $49,800 and for females it was $40,000. Note that this doesn’t match another average household income study for the 25 to 34 cohort that shows it be around $50,000. So lets call it $45,000 as an average and assume a single person with a student loan debt of $35,000. Currently only about 20% of Generation Y is a married which will affect things, but the math is a bit easier for a single person and since it 80% of Generation Y is single, it works.
It is currently being reported that members of the Generation Y cohort are graduating from college with $35,000 worth of debt, each. Depending upon where someone goes to school, how long, and how much they work during school this number could be higher or lower, but as an average it doesn’t seem half bad. A student loan payment chart [pdf] shows that $35,000 at 6.8% interest would be around $400 a month to service the debt. Note that 6.8% is higher than the current issue rate, but then again we are looking at people who have already graduated and entered into the workforce so, again, it works for demonstration purposes.
So plugging the following into a paycheck calculator:
- $45,000 annual income
- 5.3% state income tax (Massachusetts)
- $380 monthly health insurance premium (based upon $4,565 annual premium)
We arrive at a net monthly paycheck of $2,575.99. Depending upon where you live your rent can range anywhere from $650 to $1,500 which gives an average of $1,075 which in the Boston metropolitan area would be cheap. So it might be a good number to work with.
Thus, recalling that $2,575.99 monthly net salary. After we factor out rent ($1,075) and the student loan debt ($400) we are left with $1,100 to live off of. While that does seem like a lot, recall that we are not making any contribution to a 401(k) which would shrink the size of the net income and food (figure $200), car insurance (figure $100, minimum), utilities (figure at least $250, which also includes cellular service) and we are down to $550.
But what about that 401(k) contribution that we aren’t making? A 6% contribution means $163.12 less in the net while 12% gives us $326.25 less. So realistically that $550 surplus we were showing before realistically would be about $223.75 to $386.88 if we were to use the 6% to 12% 401(k) contribution rates. So at the end of the day, not that much is left over for saving for a down-payment.
Recalling the relatively modest $152,000 average cost for a home, a 20% down payment would be $30,400, plus closing costs, so call it $35,000 to buy a home. That means that if you were able to save $550 a month, then it would take you about 55 months or a 4 years 7 months to save for the down payment. Granted you could put down less, but that means a higher monthly mortgage payment. Given the absolutely horrible current rates for savings of under 1%, the interest isn’t going affect calculations that much. Plus, we are also looking at a situation where someone is not saving for retirement, doesn’t have a car payment, credit cards, and really isn’t doing much of anything with their income for that matter.
So where does this leave us? Well, to be honest, someone would be really hard pressed to convince me that members of Generation Y aren’t doing enough to try and buy a house given their incomes – you can only save so much banks aren’t exactly willing to allow NINA Loans like they were prior to the Great Recession, which is a good thing. Just because you can put less down doesn’t mean that you can actually afford to buy a home.
Something I mentioned earlier might be a good argument, namely the marriage rates. To say that Generation Y is marrying later is hard given the ages involved after all, most people don’t marry during college and it may take a couple years after college to establish yourself and get married. Realistically the only part of Generation Y that would be “marriable” in this day and age would be the 22 to early 30’s cohort so the 20% overall marriage rate is a good metric to work with but may be misleading.
The reasons for not getting married are highly variable and can be another post in and of themselves, but it goes without saying that a dual income household is going to be able to save more money than a single person can. If we had a couple hold of two incomes at $45,000 each putting 12% of their income into a 401(k) they we will likely have at least $2,000 left over after household expenses are paid. If all that is put to saving for a down payment then $30,400 could be reached in about 15 months.
But again, we are being very generous with our estimates, which means they are likely wrong. However, this is also where things tends to get interesting since the more we adjust and correct of things, the more they point to things not being Generation Y’s fault, or at least, Generation Y is subject to may circumstances than are beyond its control. Take the marriage rates, sure members of the Generation Y cohort could get married but then again, this is no guarantee that it would really affect things that much since a lot of members of Generation Y are living with their parents or room mates, thus saving more money, and still not buying homes. Even if someone is able to save more money, $152,000 for a home is a national average and thus might be something you just can’t find where you live. It’s the classic problem of cost of living.
Originally I titled this entry “No, Generation Y is not holding back the housing recovery” and while I think that title is accurate since a lot is holding back the housing recovery and blame can’t be placed on a single generational cohort, I don’t see it as easily defend-able as when I first started writing. Generation Y is definitely putting off such “milestones” that are classically associated with adulthood such as marriage and home ownership, but fluctuations in the times associated with these milestones are nothing new1 and tend to raise questions of if the economy is holding back Generation Y or if Generation Y is holding back the economy in some way.
So at the end of the day, quit trying to blame a slow housing recovery on Generation Y and making snide comments such as those that came courtesy of Mr. Mims. I’m sure if we sit down we can find a lot of reasons to explain the slow recovery of the economy as a whole and I doubt that Generation Y has the buying power to actually affect the entire economy, yet.