The Game is Rigged: Time to Redesign Our Broken Real Estate Model

Big shifts in technology, culture, and economics are changing how people in their 20s and 30s think about where they live. The way we buy and sell homes is stuck in the 20th century. Real estate is broken, and it’s time to redesign how it works.

For most of the last century, owning a home has been an integral part of the American dream. Yet those of us in our 20s and early 30s (“millennials”) are on track to having the lowest homeownership rates in recorded history.

It’s not that we don’t know that buying a home is usually a smart decision, especially if you’re going to stay in an area. Financially, buying a home lets us build equity every month instead of paying rent, and when we sell we keep the appreciated value above what we paid for it. If we don’t live in the home, we can rent it out for a steady income. Emotionally, it makes sense for us as well. Our homes are our castles. They are the roof decks where we’ll throw parties, the kitchens where we’ll cook dinner for our spouses, and the backyards where our children will play.

So why doesn’t our generation do it? Why can’t we take the plunge?

Our generation is in a tough place when it comes to real estate. We carry, on average, $20,000 in student loan debt. The average credit score for millennials is in the low 600s, meaning it’s difficult to qualify for a mortgage. We’re also mobile — in part due to the job market, we move between cities more frequently than any other age group. We aren’t buying homes, at least not at the rates we were expected to.

It’s not just macroeconomic trends that are keeping us out. The way we buy and sell homes is increasingly out of touch with the way we live our lives.

Meet Sally and John. They’re on two different life paths — but they’re destined to the same fate in real estate.

Just like the overwhelming majority (91%) of us, they both see buying a house as something they’ll do — one day.

After graduating from college, Sally does what lots of millennials do: she boomerangs home. She lives in an urban area that’s thriving, and she finds a job quickly. She’s serious about buying her first house, and her plan is to save up enough for a down payment while living with mom and dad.

John wants to buy a house too, eventually. But like many of us he’s flexible on where. Maybe he’ll get a job opportunity in London. Maybe he’ll fall in love with someone in Chicago. Renting right now just makes sense. Who wants to be tied down with a mortgage when the world is so open?

Neither Sally nor John feel ready to buy a house right now, emotionally or financially.

Let’s fast forward five years and see how things turned out for them.

Sally did save a lot living with her parents. But as often as Sally thought, just a little more, I’m so close, saving up for a down payment hasn’t been as easy as she thought it would be. She lives in an area, like many millennials, where home values grew much faster than her savings. Even while diligently saving money, Sally couldn’t keep up with the explosion in population where she lives.

Even now, she’s still several years away from buying a home,and it’ll be a lot more expensive when she does. She’s lucky enough to live in an area where home values are growing — but until she buys, that’s hurting her.

And John?

John is happy with his life until he thinks about the numbers. He’s spent an average of $1200 per month in rent for the past five years. Sure, he’s had adventures around the world, but now he’s ready to settle down and he’s adding it all up. His rent money has added up to enough to buy a home outright in some parts of the country, and enough for a healthy down payment where he wants to live.

Sally and John didn’t end up buying homes, even though they expected to. That’s because our model for investing in real estate requires both a lot of money up front, and a stable life: factors John and Sally couldn’t quite line up.

Let’s rewind and see how this might have turned out differently

There’s an alternate ending to this story, where Sally and John do buy homes for themselves. Sally works hard, saving for a downpayment, but she can’t quite save enough. Instead of giving up, she turns to her parents for help, and borrows some extra money for the down payment. She buys a two bedroom condo in Oakland and rents out the second room to a friend, earning enough to pay back her parents and cover the mortgage.

John takes a different path. Instead of renting for five years, he teams up with his friend Charlie. The two take on the challenge of buying together, and find a three bedroom house in the St. Johns neighborhood of Portland that they both love. John rents it out when he’s gone, so he can still move around just as much as he did before.

The point of this story isn’t the specific decisions that Sally and John make — it’s about how buying real estate increasingly doesn’t fit with how we live our lives.

If you want to buy real estate, the current model goes something like this: save money until you have enough for a down payment, pick a city you want to live in, find property you like, get a loan from a bank, buy the property, and then live in it happily ever after. This model has worked okay for awhile, but it’s far from ideal.

There’s a lot wrong with the way we buy real estate right now, like:

• It’s more expensive than it needs to be. Not only do you need a lot of money upfront for a down payment to qualify for credit from a bank, but you can also expect to spend between 6% and 10% of the purchase price of the home on transaction costs. It can take years to save enough money.
• It’s time consuming. Because it costs so much, it’s important to find the right house. Ideally you’d spend time understanding the market where you’re buying. Then you’d spend more time evaluating the physical house itself — what does the inspection report say? Is the roof in good shape? Are there termites? What if you have to leave — can you sell it or rent it out in this area? Even when you’ve made a decision on what to buy, the amount of paperwork and time required to close the deal is absurd.
• There’s no way to diversify. Buying a house means putting a lot of money (67% of your net worth, on average) into not just one kind of asset (real estate), but one instance of that asset (the particular house you’re buying). It’s like investing in the stock market (instead of also investing in bonds and other assets) and then investing in just one stock.

When buying real estate there are lots of things you ought to be able to do but can’t today, like:

• Invest in a city you love before you’re ready to buy a whole house. Then you could participate in the economic growth of the city and save your down payment in a form that’s insulated from rising home prices.
• Put a little money into different homes without tying yourself down. Then you could see how owning real estate works, the same way you can buy a few shares of stock to learn about the stock market.
• Transition from renting to owning over time, instead of all at once. Then you could start a path to ownership, making small investments that make sense for you, instead of needing a 20% down payment before you can even think about buying.

Put it this way: for most of us, it feels like you’re either doing armchair research about how real estate investing works in theory or you’re all in on one house; there’s nothing in between, no way to tinker, to explore, to diversify, no way to learn by doing.

We think there’s a lot that can change in how real estate works, and we’re curious to hear your stories. Have you bought property? What did you buy? How did you choose it? Did you share ownership? Did you rent it out? Have you created workarounds to make owning real estate less expensive or less complicated?

We’re thinking a lot about why the real estate game is rigged for millennials, and we’re going to be exploring it in a series of upcoming posts. If you want to learn more, get in touch with us here.

Written by Becca Chacko and Reid Williams
Visual designs by Ina Xi