In less than a decade, Millennials have gone from a generation who we worried would never move out of their parents’ basements, to the single largest driver of the housing market, accounting for 36% of all home buyers in the U.S. But that doesn’t mean it’s been easy for them.
Millennials have entered a shaky economy, an uncertain job market, and an extremely hot housing market. In the most expensive markets, they’re all but shut out from owning a home. In San Francisco, where the median home value is $1,362,200, a standard down payment of 20% would come to just over $272,000, which is far out of reach for the average twenty-something saddled with student debt.
And when Millennials do scrape together the money to buy a house, often putting less than 20% down, they sometimes end up regretting their purchase. Almost half of millennial homeowners have buyer’s remorse, and the number one reason they cited was the size of their mortgage payments. So what’s a Millennial with limited capital but high standards to do?
To answer this question, we developed the Millennial Metric to identify cities that combine affordability with high quality of life and should have particular appeal to Millennials. This metric looks at the following factors:
- Job opportunity: a measure of wage growth, income, and unemployment
- Home affordability: a measure of home values relative to income
- Livability: a measure of factors like education levels, crime rates, and average commute times
- Housing market forecast: a measure of how home values will increase or decrease over the next year
In this metric, we weigh “livability” and “home affordability” more heavily than “job opportunity” and “housing market forecast” because we believe those are more important considerations for Millennial buyers.
So what did our metric discover?
First, that Millennials should give the Midwest a good, long look. With the coastal markets from New York to San Francisco to Seattle so overheated, the heartland is the last outpost of affordable housing. The average home in a coastal city costs $397,264, compared to $230,794 in an inland city; Millennials stand to save over $166,000 just by migrating to the country’s interior.
Strangely enough, the expensive coastal cities were hurt by more than just high prices. Since prices are nearly topped out, they have nowhere to go but down, which makes homes in cities like Los Angeles or San Francisco bad investments as well as expensive ones. Home values in Los Angeles are actually expected to decline over the next year, and in cities like Seattle and San Francisco, they’re projected to see zero growth for the first time in years. Homes in the Midwest are not only projected to be great investments, but they’re also more affordable right now.
But affordability isn’t all the Midwest has to offer. The Midwest also offers an impressive quality of life, as well as booming job markets. Unemployment is lower in the heartland than in other regions of the country, and the job market is booming. There are hot employment markets on the coasts, too, notably in New York City and the Pacific Northwest, but when you combine the Midwest’s affordability with a rosy job market, its advantages become clear.
One standout is Des Moines, Iowa’s state capital. The median home value there is $188,000, which is significantly below the national average of $226,800, and it also sports a price-to-income ratio below 2.6. This latter factor is especially important, as it means there’s a healthy and sustainable relationship between incomes and home prices there. While you have to be wealthy to purchase an average home in, say, San Francisco, the average home in Des Moines is attainable even for people earning modest salaries.
The health of the Des Moines housing market is a long-standing trend and one that looks to continue on an upward trajectory. As recently as the 1980s, average household incomes in Des Moines were increasing faster than home prices. Although this trend has reversed since the early 2000s, when growth in home prices began to surpass income growth, the market still shows every sign of health. Home prices in Des Moines are projected to grow by 1.87% over the next year, which is notable considering that many hot markets are projected flat growth or declines.
And Des Moines isn’t cheap just for millennials, either. Corporations have flocked to Des Moines because it’s 15% cheaper to do business there than the national average. The financial services, publishing, and distribution and logistics industries have all set up shop there, and so many startups have been founded in the city that people have dubbed it the “Silicon Prairie.” Forbes magazine ranked it as the fifth best city in the U.S. for business and careers.
Of course, if there’s one thing we know about millennials, it’s that they care more about culture than cold hard cash. But the Midwest has that, too. In Des Moines, cocktail bars and taquerias have sprung up alongside music venues and art festivals, and the city consistently tops national quality of life rankings. This quality of life clearly has a day to day impact on Des Moines residents’ happiness; a Gallup poll in 2014 found that, out of all Americans, people who live in Des Moines are the most likely to be proud of their city.
Millennials have come a long way, but in order for them to fully achieve the American Dream of homeownership, they’re going to have to undergo a profound shift in attitudes. While no one would argue that the expensive coastal cities don’t still have a lot to offer, affordability has simply migrated to the country’s interior, and if Millennials want to own a home while still having enough money, time, and emotional bandwidth to enjoy their lives, they’d be smart to follow.
This article has been contributed by Ben Mizes from Clever Real Estate.