Are Parents Hurting Homeownership?
Millennials may have an even harder time shaking the “parents’ basement dwellers” moniker after recent data from an Urban Institute study. While a large share of recent college graduates move back into their parents’ homes with the intention of saving money in a no-or-low-rent environment, they may actually be hurting their chances at homeownership. From the study, young adults who live with their parents between the ages of 25 and 34 are significantly less likely to be homeowners ten years later.
The trend of moving back in with mom and dad has increased substantially in the past two decades. In 2000, 12% of young adults between the ages of 25 and 34 lived with their parents. By 2017 that figure had increased to 22%. Living with parents or other family members in a no-or-low-rent situation should allow young adults to save money, pay down student loans, and ideally save up to buy their own homes. Today, 71% of college students graduate with student debt. National student debt levels exceed $1.5 trillion. Student debt is one of the biggest obstacles to saving for a down payment, so why isn’t living at home helping students save?
In some cases, young adults living at home have not had a chance to build as diverse of a credit history by regular rental payments, paying monthly utility bills, or other accounts that factor into the credit score. The credit score is made up of five differently weighted components: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%). For example, a recent college graduate living at home, using a family car, sharing groceries with the family, and just repaying student loans lacks the mix of credit that a contemporary who rents an apartment, pays utilities, has financed a vehicle, and uses a credit card to help cover expenses. Increasingly, more and more parents are taking loans in their own names to help cover the cost of college expenses for their children. Even if the student is contributing to the loan repayment, if the account is in their parent’s name their credit score will not benefit from this payment history.
In other cases, young adults who live at home fail to learn the proper budgeting that would enable them to save for a down payment. Compared to young adults who rent and have to budget for a monthly rental payment, those living at home may not even consider their future mortgage payment. When parents welcome their children back into their homes, it’s important to be proactive about financial planning and money management. Make sure your children understand the purpose of this arrangement is to save money, and work with them on setting a budget to facilitate this saving.