MONEY retirement planning

Millennials Feel Guilty About This Common Financial Decision—But They Shouldn’t

Sad millennials leaning on desks
Paul Burns—Getty Images

Young adults aren't saving as much as they think they should for retirement. But paying off debts is just as important.

Millennials are pretty stressed out about their long-term finances, according to Bank of America’s latest Merrill Edge Report. Some 80% of millennials say they think about their future whenever they pay bills. Almost two-thirds contemplate their financial security while making daily purchases. And almost a third report that they often ponder their long-term finances even while showering.

What’s eating millennials? Student loan debt. Even the very affluent millennials surveyed by Bank of America feel held back by student debt—and these are 18-to-34 year-olds with $50,000 to $250,000 in assets, or $20,000 to $50,000 in assets and salaries over $50,000. Three-quarters of these financially successful Millennials say they are still paying off their college loans.

Among investors carrying student debt, 65% say they won’t ramp up their retirement savings until they’ve paid off all their loans. But with that choice comes a lot of guilt: 45% say they regret not investing more in 2014.

Contrary to popular wisdom, millennials are committed to investing for retirement. Bank of America found that the millennials surveyed were actually more focused on investing than their elders. More than half of millennials plan to invest more for retirement in 2015. But 73% of millennials define financial success as not having any debt—and by that measure, even relatively wealthy millennials are feeling uneasy.

Fear not, millennial investors. You’re doing just fine. First off, you’re saving more — and earlier — than your parents’ generation did. A recent Transamerica study found that 70% of millennials started saving for retirement at age 22, while the average Baby Boomer didn’t start until age 35. On average, millennials with 401(k)s are contributing 8% of their salaries, and 27% of millennials say they’ve increased their contribution amount in the past year. Even if you can only put away a small amount at first, you can expect to ramp up your savings rate during your peak earning years.

For now, here are your priorities:

Save enough to build up an emergency fund. You could be the biggest threat to your retirement savings. A recent Fidelity survey found that 44% of 20-somethings who change jobs pull money out of their 401(k)s. (That’s partly because some employers require former workers with low 401(k) balances to move their money.) Fidelity estimates that a 30-year-old who withdraws $16,000 from a 401(k) could lose $471 a month in retirement income—and that’s not even considering the taxes and penalties you’d owe for cashing out early. If you have to make the choice between saving and paying off debt, at least save enough to get through several months of unexpected unemployment without draining your retirement accounts.

Pay off any high-interest debt first. When you pay off debt, think of it this way: You’re making an investment with a guaranteed return. Over the long term, you might expect a 8% return in the stock market. But if you have a loan with an interest rate of 10%, you know for certain that you’ll earn 10% by paying it off early.

Save enough to get your employer’s full 401(k) match. The 401(k) match is another investment with a guaranteed return. Invest at least as much as you need to get the match—typically 6%—with the goal of increasing your savings rate once you’ve paid off the rest of your debt.

Related:

MONEY buying a home

When You’re Better Off Renting A Home Than Buying One

141017_REA_RentingOverBuying
Phoenix, Arizona. Dennis MacDonald—Alamy

Today it typically costs less to buy a place than rent one, but exceptions exist. Your situation may be one of them.

It remains cheaper to buy than rent in every one of the country’s 100 largest metro areas, according to new Trulia research. In fact, homeownership nationwide has actually become a sweeter deal, coming in on average 38% cheaper than renting today, compared with 35% one year ago, thanks to falling mortgage rates and rents rising faster than prices.

Just how much cheaper it is to buy than rent varies by area, coming in at 17% cheaper in Honolulu and 63% in Detroit (find the data for all 100 metro areas here). But those figures were calculated assuming the buyer used a traditional 30-year fixed rate mortgage with a 20% down payment. Yet there may be good reasons for financing a home purchase other ways, particularly if you’re a first-time buyer without savings or equity from another home. Or maybe you want to pay all cash in hopes of beating out other bidders in a competitive environment. Are you still better off in most cities buying than renting if you use these non-traditional payment options?

The Pros and Cons of Different Types of Mortgages

Let’s look at how the different payment options play out for a $250,000 home that the owner sells after seven years. To keep things simple, let’s start out ignoring closing costs, home price appreciation, tax benefits, and many other things we do account for when we add these scenarios to our full Rent Versus Buy model, below.

  1. A traditional 20% down, 30-year fixed-rate loan on a $250,000 home would carry a $990 monthly mortgage payment, including principal and interest. After seven years, the unpaid loan balance is $173,291, leaving equity of $76,709.
  2. All cash is just what it sounds like. You pay $250,000 upfront and that’s all equity at the end.
  3. For a 15-year fixed-rate loan, you still put 20% down. The average mortgage rate on a 15-year fixed-rate loan is almost a full point below that of the 30-year fixed rate. But the shorter term means a higher monthly payment of $1,428. The payoff is that the 15-year loan builds equity much faster: $130,507 after seven years.
  4. A 10% down payment loan with private mortgage insurance requires less money upfront. But the higher initial loan balance means a larger monthly payment plus a mortgage insurance premium of $133 per month. Furthermore, the lower down payment and higher loan balance leave equity of only $55,048 after seven years.
  5. A 3.5% Federal Housing Administration (FHA) loan calls for a down payment of only $8,750 but requires upfront and ongoing mortgage insurance premiums. The higher initial loan balance means equity of just $38,748 after seven years. That’s about half what you’d have with a traditional 20% down, 30-year loan.
Understanding the Financing Options
For a $250,000 home Traditional 20% down, 30-year fixed All cash 15-year fixed, 20% down 10% down, private mortgage insurance 3.5% down FHA
Down payment $50,000 $250,000 $50,000 $25,000 $8,750
Monthly payment (incl. mortgage insurance) $990 - $1,428 $1,247 $1,441
Equity at 7 years (no appreciation) $76,709 $250,000 $130,507 $55,048 $38,748
Note: Monthly payment is principal, interest, and mortgage insurance premium. Mortgage rates for the traditional 20% down 30-year fixed (4.30%), 15-year fixed (3.48%), and FHA (4.00%) loans are from the Mortgage Bankers Association for the week ending October 3. We use the same rate for a 10% down payment loan as the traditional 20% down payment rate, based on current rate quotes. Monthly payment includes mortgage insurance calculated for the first year of the loan. For FHA loans, the insurance premium falls over time but remains on the loan; the FHA upfront premium is rolled into the loan balance. For the 10% down loan, we assume insurance gets taken off when equity reaches 20%. All dollar amounts are rounded to the nearest dollar.

When deciding whether buying still beats renting with each of these financing options, the math gets complicated. For starters, the benefits of each option depend on how you would invest your money if you weren’t buying a home – that’s the “opportunity cost.” In addition, other factors, such as whether you itemize your tax deductions, also affect the relative benefits. Our Rent Versus Buy model factors all this in. So let’s see the results.

When Buying Is an Even Better Deal – And a Bad Idea

Remember that buying is 38% cheaper than renting nationally under our baseline model of a 20% down payment 30-year loan, tax deductions at 25%, and staying in the home seven years. Under all five of these non-traditional financing options, buying still beats renting. The gap is widest for the 15-year loan, where it’s 43% cheaper to buy. It’s narrowest for the 3.5% FHA loan, where buying is 25% cheaper.

mortgage type graphic

 

The 15-year loan ends up costing the least versus renting thanks to faster equity build-up and more of the mortgage payment going to principal rather than interest. Surprisingly, all-cash is a worse deal than a traditional 20% down, 30-year mortgage, although that hinges on our assumption about what you could earn if you didn’t tie up your money in an all-cash payment. (Geeks: we’re assuming a 3.5% nominal discount rate.) In addition, if you pay all cash, you lose the tax benefit of deducting mortgage interest. If you assume tax deductions aren’t itemized, there’s no tax benefit of getting a mortgage, which makes all-cash a better deal than a traditional 20% down, 30-year fixed rate mortgage.

The biggest shift is with the 3.5% down FHA loan, which makes buying only 25% cheaper than renting. In one of the 100 largest metros, Honolulu, buying with a 3.5% FHA loan is actually more expensive than renting. And, with this loan, buying beats renting only by 10% or less in San Francisco, New York, Los Angeles, and several other California metros.

Going further, it’s not hard to come up with realistic scenarios where buying costs more than renting in many local markets. For a millennial with little savings and no Bank of Mom and Dad, an FHA loan might be the only option. If our hypothetical twentysomething is not in a tax bracket that makes itemizing worthwhile and only stays put five years (those young people are restless), buying ends up costing more than renting in 27 of the 100 largest metros. Those 27 include not only pricey coastal markets, but also in markets like Phoenix, Las Vegas, and Colorado Springs. On the expensive coasts, it’s not even close. For instance, in this scenario, buying costs 30% more than renting in Orange County. Thus while an FHA loan might be within reach for many first-timers, in many costly parts of the country, it doesn’t make buying cheaper than renting. Our interactive map shows this for all the 100 largest metros:

 

blogpost map no 2

So, to buy or to rent? Falling mortgage rates and rising rents mean that buying looks even better versus renting than one year ago, especially in California. But buying is not for everyone. If you live in a market that’s a close call, and you plan to stay less than seven years, don’t itemize your tax deductions, or need an FHA loan, buying might not be the clear-cut winner, and could end up costing far more than renting.

 

To see the full post, including rent vs. buy figures for the 100 largest metros as well as methodology details, click here.

To read more from Jed Kolko of Trulia, click here.

Related:

MONEY 101: Should I rent or buy?

MONEY 101: What mortgage is right for me?

MONEY buying a home

Why Firemen Are More Likely to Own a Home than Economists

Firefighters
Many public service workers such as firemen own their homes. Michael Dwyer—Alamy

A new study shows which professions are most- and least- likely to be homeowners. The results may surprise you.

What do firemen, police officers, and farmers have in common? They’re all more likely to own homes today than economists, jewelers, and accountants.

These are the results from a newly released study, done by Ancestry.com, looking at the relationship between profession and home ownership today and over time. The website teamed up with the University of Minnesota Population Center to analyze Census data between 1900 and 2012, creating a century-spanning log to show how ownership changed over the decades.

Looking at the most recent 2012 data, the research found that 79% of policemen and detectives own a home, yet only 64% of economists do. Farmers (81%) and firemen (84%) are in the top ten professions most likely to own a house, ranked above jobs like accountants (76%), and far higher than members of the armed forces (33%). Nationwide, the data shows 64% of the population owns their home.

Another surprising finding: the stereotype of the starving artist isn’t necessarily reflected in the data—at least for some industries. It turns out 63% percent of artists and art teachers own homes, as well as 62% of musicians and music teachers, 63% of authors, and 57% of entertainers. It’s not all roses for the artistic class, though. Just 37% of actors and actresses own a house, and that number sinks to 23% for dancers and dance teachers.

Toddy Godfrey, a senior executive at Ancestry.com, points out that there are both high and lower income professions on the most-likely-to own list, suggesting there isn’t a direct relationship between high wages and ownership. Typically lucrative professions like optometry tend to own, but so do lower-paid trade and public service workers.

“You look at some of the jobs on the top of the list, and they’re clientele based, or teachers, or others who are community rooted,” says Godfrey. He speculates that professions most likely to own “have a long-term connection to the community they live in.” That reasoning may also explain why tradesmen tend to buy instead of rent. Godfrey guesses many of these workers are tied to regional manufacturing, and therefore are more likely to set down roots.

Another trend the data suggests is that temporary and highly mobile workers tend to avoid homeownership. That could explain why so few military service members own houses, as they can be redeployed elsewhere and may choose to move once their service ends.

Finally, Godfrey highlights the fact that while ownership took a hit in the bust, the majority of Americans own their home. That’s up from 32% in 1900, though most of the growth happened pre-1960. “Maybe it’s come down a point in the last few years, but it’s held pretty steady at two thirds,” says Godfrey.That trend has been pretty constant.”

Top 10 Professions for Home Ownership in 2012

1. Optometrists: 90%

2. Toolmakers and Die Makers/Setters: 88%

3. Dentists: 87%

4. Power Station Operators: 87%

5. Forgemen and Hammermen: 84%

6. Inspectors: 84%

7. Firemen: 84%

8. Locomotive Engineers: 84%

9. Airplane Pilots and Navigators: 83%

10. Farmers: 81%

Bottom 10 Professions for Home Ownership in 2012

1. Dancers and Dance Teachers: 23%

2. Motion Picture Projectionists: 27%

3. Waiters and Waitresses: 27%

4. Counter and Fountain Workers: 28%

5. Members of the Armed Forces: 33%

6. Service Workers (except private households): 34%

7. Bartenders: 35%

8. Housekeepers and Cleaners: 35%

9. Cashiers: 36%

10. Cooks (except private households): 36%

MONEY mortgages

Wells Fargo Settles Charges It Refused Mortgages to Moms

A woman walks past teller machines at a Wells Fargo bank in San Francisco, California.
Wells Fargo promised to enact new Temporary Leave Underwriting Guidelines and educate their loan officers. Robert Galbraith—Reuters

A woman says a mortgage loan officer told her, "Moms often don’t return to work after the birth of their little ones."

Wells Fargo Home Mortgage agreed Thursday to pay $5 million to settle allegations that its home loan officers discriminated against pregnant women and women on maternity leave out of fear that the mothers would not return to work, potentially jeopardizing their ability to repay the loans.

Six families alleged that loan officers employed by Wells Fargo, the biggest provider of home loans, made discriminatory comments during the mortgage application process, made loans unavailable to them, and even forced mothers to end maternity leave early and return to work before finalizing the loans. One of the six complainants was a real estate agent who alleges he lost a commission due to discrimination against one of his clients.

Lindsay Doyal, one of the women who filed a complaint with the Department of Housing and Urban Development, says that she was denied a mortgage despite providing several letters from her employer confirming that she intended to go back to work, the Washington Post reports. Doyal says she received an e-mail from a Wells Fargo loan officer that said, “moms often don’t return to work after the birth of their little ones.”

Since 2010, HUD has received 90 maternity leave discrimination complaints, 40 of which have been settled, with a total of almost $1.5 million going to loan applicants. The families in the Wells Fargo case will receive a total of $165,000, and Wells Fargo will create a fund of up to $5 million for other affected mortgage applicants.

“The settlement is significant for the six families who had the courage to file complaints, and for countless other families who will no longer fear losing out on a home simply because they are expecting a baby,” HUD Secretary Julián Castro said in a statement. “I’m committed to leveling the playing field for all families when it comes to mortgage lending. These types of settlements get us closer to ensuring that no qualified family will be singled out for discrimination.”

Wells Fargo promised to enact new Temporary Leave Underwriting Guidelines and educate their loan officers.

“We resolved these claims to avoid a lengthy legal dispute so we can continue to serve the needs of our customers,” Wells Fargo said in a statement. “Our underwriting is consistent with longstanding fair and responsible lending practices and our policies do not require that applicants on temporary leave return to work before being approved. The agreement resolves claims related to only five loan applications from a period when Wells Fargo processed a total of approximately 3 million applications from female customers.”

[Washington Post]

MONEY Millennials

How Millennials Stalled the Housing Market Recovery

Wrecking ball hitting brick wall
Steve Bronstein—Getty Images

Millennials already have to deal with hefty debt from college, an iffy job market, and growing up in an era where MTV no longer plays music videos, but now they’re being blamed for holding back the real estate boom. Homebuilder adviser John Burns Consulting published details from a study earlier this month concluding that student loan payments will cost the housing industry 414,000 transactions this year that would have totaled $83 billion in sales.

Ouch. The ivory tower is crumbling at the foundation.

It’s been widely assumed that mounting student debt is eating away at this otherwise buoyant housing market recovery. John Burns Consulting’s study — boiled down to a free one-pager for those that aren’t paying customers that got the more thorough report — attempts to quantify the impact.

How did the adviser arrive at $83 billion? Well, we start with the 5.9 million households under the age of 40 that are paying at least $250 in student loan debt, nearly triple the 2.2 million leveraged college grads in the same predicament back in 2005. We then get to the assumption that $250 earmarked for student loan debt every month reduces the buying power of a potential homebuyer by $44,000. That’s bad, and it’s naturally worse depending on how much more than $250 a month some of these indebted students have taken on to pay back. That’s less money they can commit to a mortgage. John Burns Consulting offers up that most households paying at least $750 a month in student loan have priced themselves out of the housing market entirely.

It gets worse

The study only looked at folks between the ages of 20-40. That’s a pretty sizable lot, especially since 35% of all households in that age bracket have at least $250 a month in student debt. However, even John Burns Consulting concedes that there’s “a big chunk of households over age 40 who have student debt” as well. It’s not likely to be as bad, naturally, but it’s all incremental at this point.

This report also happens to come at a time when the housing industry is starting to flinch after a couple of years of boom and bounce. Right now everything seems great. New home sales data released this past week showed the industry’s highest monthly growth rate in more than six years. However, the near-term outlook is starting to get hazy.

Shares of KB Home KB HOME KBH -2.1118% shed more than 5% of their value on Wednesday after reporting uninspiring quarterly results. Revenue and earnings fell short of expectations, and the same can be said about its number of closings and order growth. Earlier this month it was luxury bellwether Toll Brothers TOLL BROTHERS TOL -0.6841% setting an uneasy tone after posting a year-over-year decline in the number of contracts it signed during the period and an uptick in the cancellation rate for existing home orders.

It gets better

The student debt crisis is real, and the skyrocketing costs of obtaining a postsecondary education naturally open up the debate of its necessity. However, it’s also important to remember that university grads are earning far more than those that don’t attend college.

Source: U.S. Department of Education, National Center for Education Statistics. (2014). The Condition of Education 2014 (NCES 2014-083), Annual Earnings of Young Adults.

The median of annual earnings for young adults in 2012 was $46,900 for those with a bachelor’s degree, $30,000 for those with just a high school degree or credential and $22,900 for those who did not complete high school. Those going on to grad school for advanced degrees — and that’s where student loans can really start to pile up — are at $59,600 a year.

In other words, most college grads, and especially grad school graduates, are typically better off than those that didn’t pursue higher education, even with the student loan albatross around their white-collared necks. The housing industry would be better off if colleges were cheaper or if student debt levels were lower, but the same can be said about purchasing power in general. At the end of the day, debt-saddled or not, the housing industry needs its college graduates.

MONEY buying a home

How to Get Ready to Buy a Home

Checking your credit report and getting pre-approved for a mortgage are key, says Century 21 CEO Rick Davidson.

MONEY buying a home

Rupert Murdoch Wants to Sell You Your Next Home

News Corp. has acquired Move Inc., putting Murdoch's business in the thick of the online listings war.

UPDATE—3:28 P.M.

Home buyers take note, your next house could come courtesy of the Murdoch empire. On Tuesday, the Australian billionaire’s News Corp announced it was buying Move Inc., the real estate listings company that owns Move.com, Realtor.com, and other online listings websites, for $950 million.

While Move is hardly the market leader among listing websites—competitors Trulia and Zillow account for 71% of traffic to ComScore’s real estate category—it long claimed to be the most accurate. Thanks to an agreement with the National Association of Realtors, the company’s sites have partnerships with more than 800 multiple listings services, which provide real estate listing information as soon as a home comes on the market. Zillow and Trulia have previously been dinged for out-of-date information, and Zillow CEO Spencer Rascoff raised eyebrows when he appeared to suggest that fixing stale listings wasn’t one of the company’s top priorities. (Zillow has stressed that the CEO’s statement was taken out of context, and emphasized their constant effort to improve listings.)

But despite Move’s data advantage, and recent ad campaigns stressing its superior accuracy, taking on Trulia and Zillow has been an uphill battle. That battle became even more difficult in July, when Zillow purchased Trulia for $3.5 billion, creating an online real estate behemoth. News Corp’s entrance into the market may finally give Move the marketing muscle to fight back. News Corp. CEO Robert Thomson signalled the company’s dedication to Move’s business, stating that the acquisition would make “online real estate a powerful pillar of our portfolio.” He also indicated the company will strongly support Move’s brand. “We intend to use our media platforms and compelling content to turbo-charge traffic growth and create the most successful real estate website in the U.S.,” said Thomson.

A News Corp-powered Move might ultimately be a boon for homebuyers by reducing Zillow/Trulia’s hold on the online listings market. When Zillow’s purchase of Trulia was first announced, some worried the new company would have more leverage to charge real estate agents higher advertising fees, and that this charge might be passed on to the consumer. More robust competition may give agents more options for online advertising and reduce Zillow/Trulia’s bargaining power. However, other experts believe the News Corp. acquisition will have little real effect on consumers. Jonathan Miller, CEO of Miller Samuel Inc, told MONEY the Move acquisition is unlikely to be felt by your average house hunter.

“I think what you’re seeing is [the housing market] improve,” said Miller. “There’s more focus on the housing sector, there’s a lot of cross branding opportunities with News Corp. and their holdings with real estate, but I don’t see it having any real impact on transactions. I don’t think the consumer is going to see this.”

MONEY buying a home

The Surprising Feature Millennials Insist on When Buying a Home

Century 21 CEO Richard Davidson explains what young, single home buyers value in a new house.

MONEY home improvement

Historic Homes For Sale For As Little As $1

These three houses, featured recently in This Old House magazine, can still be had for rock bottom prices, but plan to spend thousands to overhaul them. If no buyer saves the structures, they may face demolition or are at risk of deteriorating beyond repair.

For the full gallery of homes for sale, plus featured houses that have been saved by buyers and structures that were demolished, click here for the original post on thisoldhouse.com.

MONEY home prices

Slowing Price Gains Reveal Little Exuberance for Homes

140826_REA_HousePricesSlow
Dimitri Vervitsiotis—Getty Images

Looking ahead, the rate of home price growth may slow even further, especially if mortgage rates increase.

While housing prices continue to rise, the rate of that growth nationally slowed in June, according to a leading gauge of the real estate market.

The S&P/Case-Shiller Home Price Indices showed that home prices throughout the country increased 6.2% since last year. Meanwhile, separate indexes that track 10 and 20 large U.S. cities showed gains of 8.1% during the same time period.

Though decent, those gains were a far cry from the double-digit growth in home prices late last year. Moreover, all three indexes showed deceleration from the prior month, and every city measured experienced lower year-over-year price growth.

“Home price gains continue to ease as they have since last fall,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices. “For the first time since February 2008, all cities showed lower annual rates than the previous month. Other housing indicators — starts, existing home sales and builders’ sentiment — are positive. Taken together, these point to a more normal housing sector.”

Blitzer also cautioned that an increase in interest rates, which Federal Reserve chair Janet Yellen hinted at last week, may mean further deceleration if they lead to higher mortgage rates.

“Bargain basement mortgage rates won’t continue forever,” he said. “Recent improvements in the labor markets and comments from Fed chair Janet Yellen and others hint that interest rates could rise as soon as the first quarter of 2015. Rising mortgage rates won’t send housing into a tailspin, but will further dampen price gains.”

To be sure, home prices are still going up across the board. All cities reported higher prices for the third consecutive month, and price growth in markets such as Dallas and Denver has continued unabated.

Nationally, average home prices in June are back to Spring, 2005 levels. But city composites are still roughly 17% down from their peak prices in June/July of 2006.

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