Finding Your Path

The Millennial Dilemma: “I Like the House, but I Don’t Have the Dough.” (Or “This is All I Can Get for $2,500 a Month?”)

By Lorne Polger, Senior Managing Director

Lorne PolgerMy oldest graduates from college this weekend. It is a very proud parent moment. She is a responsible, successful, hard-working, driven young woman. I know that success will her follow on her path, wherever that takes her. Can’t ask for much more than that.

It has brought back memories from my college graduation, 32 years ago. I spent some time thinking this past week about some of the parallels and some of the distinctions between that time and now; how I felt about what lay ahead, and how she may be feeling about things. When I graduated in 1984, I had about $12,000 in student loans. My monthly bill from some arcane U.S. government agency was about $240/month. Seemed like a lot every time I had to write that check. I also remember being thankful for the additional loan deferment period when I started law school. I don’t know if that amount was more or less than the average kid at the time, but it felt about typical. I was really bullish about the opportunities ahead, notwithstanding the uncertainties of what I was going to do or even where I was going to live. I had good friends and a supportive family, which helped to lay the foundation for that next chapter.

I worked a bunch of different jobs in Denver that first year after graduation. I remember renting a cute little house in a decent urban neighborhood….for $400/month (not including utilities!). I think my long showers may have boosted the monthly cost way up to $440/month. Had enough bucks left over to get some skiing in, grab an occasional meal and have some fun with friends. As I recall, $22 got you a day of skiing in Vail (not including beers). Even saved up for a nice trip to Australia and New Zealand and began to seriously think about what that first home might look like.

HouseI finished law school in 1988 and moved down to San Diego. I will always remember having a conversation with one of the other associates that fall. He looked at me somewhat incredulously when I told him that my wife and I were renting a home. “Renting? Are you kidding? You’re a lawyer now. Time to step up and buy! Why throw it down the drain?” In 1989, that first house cost us $189,000. The mortgage rate was at 10.8% and our payments were about $1,800/month. Big chunk of change at that time. But you know, it felt pretty darn good to own something (the fact that the value dropped like a rock from 1989 to the time we sold it in 1995 isf a story for another article). My wife and I were building a life together and owning that house felt like a really big part of it. Most of our friends felt the same way. A house was the third leg of the financial stool, along with a good job and making some decent investments. It was a very prominent goal for us in our mid-20s.

Today, not so much. And there are many reasons why.

First and foremost is the ability of millennials today to save up sufficient money for a down payment on a home or condo. And they are getting hit on two fronts. Using my same Denver example, from 2009 to the first quarter of 2016, apartment rental rates in the Denver metro area rose by an astonishing 51.9%. From an average of $875/month to $1,315/month. And those are average rates. Great for an apartment owner, not as much for an apartment resident. But as they like to say on late night TV, that’s not all. During that same time period, the average home price rose an incredible 61.7%! From $243,000 in 2009 to a whopping $393,000 this year. Now, that would work if wages rose correspondingly. But that’s not the case – it’s not even close. In 2009, the average annual income in metro Denver was $48,560. By 2015, it had risen to $54,435, a 12.1% increase. Of course, that increase doesn’t account for the additional federal and state taxes on those higher wages. And by the way, Denver looks pretty damn inexpensive when compared to west coast cities like Seattle, Los Angeles, San Francisco and San Diego.

DebtI’ve written about student debt before and most have seen the numbers, but they bear repeating. As of 2015, 43 million Americans have a combined $1.2 trillion in outstanding student debt. Trillion. Student loan debt in this country is completely out of control and it’s a looming disaster of catastrophic proportions. If there was a way for me to short Sallie Mae, I would bet the farm (and I’m not a farm bettor). In 2015, the average undergrad walked away from school carrying a backpack filled with knowledge, enthusiasm, a Bernie Sanders decal, and a debt to Sallie Mae for $37,000. That represents a monthly payment of about $500 and interest costs of over $14,000 over the life of the loan. Ouch. And I’ve seen it first hand from my kids’ friends and the children of my friends.

So, the median home price in Denver today is $393,000 (let’s call it $400,000). That requires a down payment of $80,000. That’s after tax dollars of course, so really, it means that you are putting aside about $150,000 of income to meet that nut. Hmmm, let’s do the math. Average Jane and Joe are making about $50,000, they’re paying $16,000/year in housing costs, another $15,000 in taxes, $5,000 in student loan debt and the rest to live. Where is that down payment coming from? Frankly, I wonder where the beer and ski money is coming from? That’s a pretty toxic mix: Higher costs, higher debt and higher prices.

For many of those reasons, the U.S. homeownership rate has plummeted to its lowest level since the mid-1990s. In 2005 (the peak), the rate was 69.1%. Today it sits at 63.5% and most pundits call for a continued, albeit slower, decline.

There are other reasons beyond math too. What is a home and what does it represent? A financial foundation, stability, a place to marry, raise a family. All of those decisions are being deferred. Millennials are more mobile. They are much less apt to stay at a job. They are much more likely to move. Generally, they have gone away to school. And they are getting married much, much later. In 1960, the average woman got married at 20, the average man at 22. In 1990, the numbers moved to 23 and 26. Today, they’re 27 and 29. And then you overlay what they witnessed during the Great Recession.

RentTakeaways? Based on the stats, you have to conclude that we will continue to transform from a society of owners to a society of renters. Bodes well for the apartment and rental housing businesses. But I don’t think I would want to be a production home builder these days. The fortunate few millennials have a mom who says “Honey, do you need a little help from Dad with that down payment?” Good luck to the rest of them. Meanwhile, I’m meeting with my partner to discuss Pathfinder’s acquisition strategy for the next few quarters. Think I’ll lead with “Mitch, let’s go buy more apartments!”

Lorne Polger is Senior Managing Director of Pathfinder Partners, LLC. Prior to co-founding Pathfinder in 2006, Lorne was a partner with a leading San Diego law firm, where he headed the Real Estate, Land Use and Environmental Law group. Reach him at