Owning a home has been part of the American Dream for decades, and it is one of the biggest investments many people plan for in their lifetime. When home prices and interest rates go down, demand increases as people flock into the housing market to purchase a new home.

However, there is one demographic that isn't necessarily setting its sights on the milestone of homeownership right away even in today's low interest rate environment. In fact, more Millennials are delaying the purchase of their first home.

But why? Read on to find out more about what's keeping this group at home with their parents and why they aren't buying homes at the rate of previous generations.

Key Takeaways Millennials are not buying homes as readily as the previous generation.

Delaying marriage and having children is keeping many Millennials at home with their parents.

The burden of student debt is preventing many young people from saving up for a down payment and buying a new home difficult as the affordability gap widens.

Tighter lending criteria can also make homeownership unaffordable or virtually impossible for those without much credit history.

1. Affordability

Mortgage payments, as a rule, should not exceed 25% of a homeowner's monthly gross income. Anything above that suggests they cannot afford the home. This means buying a home will not be as easy for Millennials as the affordability gap widens between home values and income levels.

According to the National Association of Realtors (NAR), the home affordability index rose again above 100 in January 2020. In 2015, the index was 109.3, and in 2018, the value dipped as low as 92.5. An index value of 100 means that a family with a median income has exactly enough income to qualify for a median-priced home. The index is an average across the U.S., so there are areas of the country that are more affordable. The question is whether or not Millennials are willing to relocate and leave jobs, friends, and family in order to buy a home.

2. Not Married (or Partnered) Yet

In 2018, less than 60% of people aged 25 to 34 lived with either a spouse or partner versus 80% in 1967. In fact, people now are getting married later, with the average marriage age at 27.8 for women and 29.8 for men, according to 2018 figures from the U.S. Census Bureau.

Meanwhile, the average age of a first-time mom is 26, according to the Centers for Disease Control (CDC), though the age increases for college-educated women and women in urban areas. The changing dynamic of getting married and having children means Millennials are staying at home with family longer and delaying the purchase of their first home.

"Life events such as getting married or having children are typical triggers to buying a home. The longer this age group lives with parents or independently, the more homeownership will be delayed," stated Bank of America in a report about Millennial home buying trends.

Getting married later in life and delays in having children are helping increase the percentage of Millennials living at home or with relatives to 22.5% in 2018—an increase of nine percentage points since 2005.

3. High Levels of Student Debt

Student debt hit almost $1.6 trillion in the U.S. by the beginning of 2020. As such, it's now become a burden on Millennials trying to enter the housing market. This same group is also contending with stingy wages and raises in much of the job market, putting added strain on paying off those loans.

According to NAR, more than 50% of home buyers under the age of 36 said that student debt delayed their home buying. Apartment List estimated that while college grads without student debt needed 7.6 years to save for a 20% down payment in 2018, those with debt needed to save more than four years longer.

4. Tighter Lending Standards

Banks tightened credit underwriting to reduce risk. They also double-downed on the 20% down payment rule for homebuyers. But as prices rise, it is taking Millennials longer to accumulate enough cash to put down on a home.

"Remember that the bulk of the current 25- to 34-year-old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile," Bank of America noted.

While mortgage affordability programs may offer loans with less than 20% down payments, lenders often charge higher interest rates on these loans to offset the greater default risk. Additionally, most of these mortgages will require that Millennials take out private mortgage insurance (PMI), making monthly payments even higher.

5. The Lure of Bright Lights

Millennials continue to flock to cities in large numbers. Pew Research found in 2018 that 88% of Millennials now live in metropolitan areas. Whether it is a social movement or the lure of greater work opportunities, Millennials are moving to regions with a higher proportion of renters compared to homeowners, pushing rental prices up higher in the urban centers where they prefer to live. So far, Millennials seem unwilling to commute or even own a backyard. According to BuildZoom, new home sales within five miles of the centers of the 10 most densely cities have exceeded year-2000 levels but sales are about 50% below 2000 levels 10 miles outside the city.

Much has been made of Millennials and their spending habits in the big cities—new clothes, Amazon Prime, the latest iPhone, and daily Starbucks. However, data from the Bureau of Labor Statistics (BLS) debunks this notion a bit. Expenditures on apparel and entertainment fell 1.4% from 2004 to 2015. The biggest decrease in Millennials' shopping basket—spending on owned shelter—dropped 2.6%. Meantime, spending on rental shelter had the largest increase, rising 3.2%.

The Bottom Line

Home prices continue to rise in the U.S. and while Millennials are delaying homeownership, evidence suggests it is not completely out of reach. While some financial constraints remain—student debt and down payments—social changes in how young adults are living have pushed homeownership to record low levels and have seen the average age of Millennials staying at home rise.