(Bloomberg Opinion) -- Millennials have aged into home-buying territory. Last year, we made up the largest demographic of house buyers, according to the National Association of Realtors. Elder Millennials, or those born between 1980 and 1989, accounted for 23% of buyers in 2021, while younger Millennials, those born between 1990 and 1998, were 14% of buyers.
So it's no wonder why I'm often asked about how one should save for a down payment on a house. In fact, this was the most common financial goal for 2022 among my Instagram followers.
But should millennials actually be keeping funds sitting in a cash bank account? Even when house prices are soaring and when there are other ways to build wealth? In most cases, yes. It's definitely frustrating to have your money languishing with no growth amid rising inflation — especially when everything from crypto to NFTs is being touted as an investment opportunity. But the old-school financial wisdom prevails: It still makes the most sense to hang onto your down payment fund.
Realtor.com predicts that the 2022 U.S. housing market will continue to hit record highs. Zillow Consumer Housing Trends found that the median buyer had to submit two offers in 2021, up from just one between 2018 to 2020. Of these buyers, some 37% were first-timers. According to data from the Federal Reserve Bank of St. Louis, the median sales price on a home in 2021 in the Northeast and West U.S. tipped to more than $500,000, while the Midwest and South were just below $375,000.
A home is often the single largest purchase people make. Let's say the common home cost for a first-time buyer is $200,000. For a conventional loan, you usually need at least 3% down as a minimum. On a $200,000 home, that would be $6,000 — not so bad perhaps. But you need to do the math to see how affordable your monthly mortgage payment would be with only the minimum amount down. You could end up paying private mortgage insurance (PMI), and your interest rates could be higher if you put down less than 20%.
While $6,000 doesn't feel so painful to have in savings, what about someone who is aiming for at least 20% down? Now we're talking $40,000 — that's a big chunk of change to be sitting in the bank, not keeping up with or outpacing inflation.
But much like an emergency fund, it's ill advised to put risk on money that's earmarked for an intended purpose with a short timeline. If you're talking about using the funds in the next year or two or even three, they should mostly be saved, not invested. Having your cash accessible is even more critical in a highly competitive housing market.
What would happen to your down payment if it's invested and the market has a significant correction? The last week has already sent up a warning shot. Certainly such trembles have happened before without a sustained correction, but sooner or later there will be one. A market falter around the same time you need to cash out could be the difference of hundreds to thousands of dollars you might need to be competitive with your offer. Unless you are okay with potentially pushing back the timeline to buy your home, it's the safer strategy to focus on saving.
Then again, there are always exceptions.
My husband and I only have 10% of our down payment fund parked in savings, with the rest invested mostly in index funds. However, like the bedrock of any solid investment strategy, our savings approach is tied to our time horizon and risk tolerance, as well as to the type of home we aim to buy. In our case, we're first-time home buyers looking for a vacation home not a primary residence.
We're not as much of an anomaly as you might think. The online real estate marketplace Zillow released in its 2022 Hot Housing Takes that more Gen Z and Millennials will buy a second home before a primary residence. While the ability to work remotely has made some flee from city centers, it's made others seek to combine urban living with frequent getaways.
Like many New Yorkers, we enjoy the occasional weekend outside of the city to recharge our batteries in nature (think Catskills not the Hamptons). We didn't want to leave New York, but after buying a car during the pandemic, we suddenly became open to the possibility of owning a weekend home upstate. Whereas owning a home in the city is extremely cost-prohibitive, purchasing a second home or an investment property has become a more enticing proposition.
It's a scenario that can sound deranged to non-city dwellers, but it's met with an understanding nod when discussed with fellow New Yorkers. It's also a scenario with no firm timeline and the potential to never come to fruition, 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 when we're not even fully committed to home ownership on a short timeline is too much for my wealth-building aspirations to bear. But it's only for these outlier situations that investing your down payment is appropriate.
Otherwise, keep it simple with minimal (or no) risk.
More From Bloomberg Opinion:
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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.”
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