The difficulty of saving for a down payment is putting the American dream out of reach for many young Americans.
A new study from Trulia finds that having a college degree doesn't necessarily help graduates save early on and in some markets actually slows young people from buying a home with a traditional 20% down payment. That’s largely because so many Americans are saddled with student loan debt. The total amount of outstanding student loan debt in the United States is $1.2 trillion.
“A lot of people tend to think that having a college degree means you’ll be able to save for a home much faster because you’re making more money,” Trulia housing economist, Ralph McLaughlin tells Yahoo Finance. “But the trade off is that if you go to college, you’ll likely have student loan payments. And those student loan payments can keep you, delay you, from saving up for a down payment on a home,” he says.
Trulia took a look at the projected income growth of a household with or without a college degree over a lifetime as well as the projected growth in prices while a household is trying to save for a down payment. It also factored in extra costs like student loan payments.
No degree, No problem?
In the metropolitan areas of Columbia, South Carolina, El Paso, Texas, Las Vegas, Nevada and Daytona Beach, Florida, it takes less time for a 25 to 30 year-old to save up for a down payment without a college degree than it does with one. In both Columbia and El Paso, a young person could save up for that 20% down payment 1.6 years sooner without a college degree than if he or she has a college degree, according to the Trulia report. The premium for having a college degree in these metro area job markets is much smaller and the housing markets are relatively inexpensive.
It's still about location, location, location
Of course, not all housing markets are the same, and in the long run, a college education pays. A worker with a bachelor’s degree will earn $1.19 million over his or her career. That’s twice what the typical high school graduate will earn over his or her career.
In San Francisco, it's apparent. Trulia finds that without a college degree, it’s impossible to save up to buy a home with prices already high and rising quickly, up 10% in the last year. The monthly increase in the required down payment outpaces the jump in the total monthly household savings over a lifetime. With a college degree, it would still take a young person 29.4 years to save up for the required down payment in San Francisco.
In Los Angeles and Orange County, California, it takes more than 20 years longer for a young person without a college degree to save for a home than someone with a degree. In San Diego and San Jose, it takes more than a decade longer to buy a home without a degree.
Best markets for young people to buy
But the Trulia study found there are plenty of markets where young people can save up for a down payment in less than ten years whether or not they have a college degree. The markets where Americans aged 25 to 30 can save up most quickly include Detroit, Michigan (4.1 years with a degree, 5.3 years without), Camden, New Jersey (5.3 years with a college degree, 5.9 years without) and Dayton, Ohio (5.7 years with a degree, 5.3 years without one), assuming putting 20% down on the median home price in those cities.
Breaking with Tradition?
The Trulia study is based on a 20% down payment, the traditional payment that allows buyers to avoid mortgage insurance. Of course, you can buy a home by putting a smaller percentage down. Trulia found that if a young person without a college degree saved up for a 10% down payment, he or she could buy a home in 28.5 years in San Francisco, 12.8 years in Los Angeles (vs. 39.9 years with a 20% down payment) and just 8.8 years in New York (vs. 20.2 years with a 20% down payment).
But weighing the extra costs involved with putting less than 20% down on a home, in the end, it’s more beneficial to have a college degree. "Lifetime earnings for those with a college degree are quite a bit more than households who don’t have a college degree," McLaughlin says. "So even though it takes longer in some markets to save for a down payment without a college degree, in the long run, you are probably more likely to be able to save for the home of your dreams."