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Millennials have aged into home buying territory. Last year, we were the largest homebuyer demographic, according to the National Association of Realtors. Older millennials, or those born between 1980 and 1989, made up 23% of buyers in 2021, while younger millennials, those born between 1990 and 1998, made up 14% of buyers.
No wonder I am often asked how to save for a down payment on a home. In fact, this was the most common financial goal for 2022 among my Instagram followers.
But should millennials actually keep funds in a cash bank account? Even when real estate prices are skyrocketing and there are other ways to build wealth? In most cases, yes. It is truly frustrating to watch your money languish without growth amid rising inflation, especially when everything from crypto to NFTs is presented as an investment opportunity. But old-school financial wisdom prevails: it always makes more sense to hang on to your down payment fund.
Realtor.com predicts that the US real estate market in 2022 will continue to reach record highs. Zillow Consumer Housing Trends found that the median buyer had to submit two offers in 2021, compared to only one from 2018 to 2020. Of these buyers, about 37% were first-timers. According to data from the Federal Reserve Bank of St. Louis, the median selling price of a home in 2021 in the Northeastern and Western United States has tumbled to over $500,000, while the Midwest and the south were just under $375,000.
A home is often the most important purchase people make. Let’s say the common cost of a home for a first-time buyer is $200,000. For a classic loan, you generally need at least 3% down payment. On a $200,000 house, that would be $6,000 — not so bad, maybe. But you have to do the math to see how affordable your monthly mortgage payment would be with just the minimum amount down. You could end up paying for private mortgage insurance (PMI) and your interest rates could be higher if you pay less than 20%.
While having $6,000 in savings isn’t that bad, what about someone who is aiming for at least 20% down payment? Now we’re talking $40,000 – that’s a lot of money that’s sitting in the bank, not keeping up with or outpacing inflation.
But just like an emergency fund, it is inadvisable to risk money that is earmarked for a specific purpose with a short time frame. If you’re talking about using the funds over the next year, two or even three years, they should primarily be saved, not invested. Having your money accessible is even more critical in a highly competitive housing market.
What would happen to your down payment if it were invested and the market suffered a major correction? Last week has already sent a warning shot. True, such tremors have occurred before without sustained correction, but sooner or later there will be one. A market drop around the same time you need to cash out could be the hundreds to thousands of dollars difference you might need to be competitive with your offer. Unless you’re okay with potentially pushing back your home purchase deadline, it’s the safest strategy to focus on saving.
Again, there are always exceptions.
My husband and I only have 10% of our down payment fund parked in savings, with the rest mostly invested in index funds. However, like the foundation of any sound investment strategy, our approach to savings is tied to our time horizon and risk tolerance, as well as the type of home we are aiming to buy. In our case, we are first-time buyers looking for a holiday home, not a main residence.
We’re not as much of an anomaly as you might think. Online real estate market Zillow published in its Hot Housing Takes 2022 that more Gen Z and millennials will buy a second home before a primary one. While the ability to work remotely has caused some to flee city centers, others have sought to combine city life with frequent jaunts.
Like many New Yorkers, we occasionally take advantage of the weekend out of town to recharge our batteries in nature (think the Catskills, not the Hamptons). We didn’t want to leave New York, but after buying a car during the pandemic, we suddenly opened up to the possibility of owning a weekend home upstate. While owning a house in the city is extremely expensive, buying a second home or apartment building has become a more attractive proposition.
It’s a scenario that may seem deranged to non-locals, but it’s met with an understanding nod when discussed with other New Yorkers. It’s also a scenario with no specific timeline and one that may never materialize, which is why 90% of our “down payment fund” is invested in the stock market. To have a significant amount of money languishing in savings while we are not even fully committed to home ownership in a short period of time is too much for my aspirations to build wealth. But it is only in these aberrant situations that it is appropriate to invest your down payment.
Otherwise, keep it simple with minimal (or no) risk.
Erin Lowry is the author of “Broke Millennial”, “Broke Millennial Takes On Investing” and “Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations”. She wrote this for Bloomberg Opinion.
