Hi, I'm Kevin. I write a free newsletter about money for 904 other Millennial parents. We talk about how to turn your money into memories.
Welcome to Financially Well, the finance podcast for Millennials. In this episode, I want to discuss recent articles about Millennials who have purchased a second home. To clarify, these Millennials don’t own a primary residence in which they live full time. Instead, these Millennials rent, typically in large, high-priced cities such as Washington, DC. But, according to the trend stories I’ve seen, these Millennials have purchased a “second home” in a less expensive, more remote location.
On January 20, 2022, Aly Yale wrote an article for Money magazine entitled, “For These Millennial Homeowners, the Vacation House Is the New Starter Home.” Then, on March 18, Candance Jackson wrote an article for The New York Times entitled, “When Your Second Home Is the First One You Buy.” Both articles describe and interview people – often Millennials – who believe they have found value in purchasing real estate far away from their current house or apartment rental. Of course, this significant financial decision – and life decision, for that matter – may indeed make sense for the people interviewed. But how many Millennials should actually buy a second home before a starter home?
When you hear the phrase “second home,” what do you think of? In her Money magazine article, Yale defined vacation homes as “ones they plan to use only part of the time and rent out the rest.” They add, “Traditionally, these would be considered “second homes” — properties bought years after buying and settling into a primary house.”
So, are many Millennials buying second homes before they own a primary, full-time residence? As Jackson writes in The New York Times, “There isn’t data to track this trend.” But the anecdotes apparently seem compelling enough that the Times, Money, Lifehacker, and other media outlets all have written about the idea.
As evidence, the authors point to a variety of tangentially-related housing data. Jackson notes in The Times that, “Vacation home purchases in general boomed during the pandemic. In 2020, loan applications for vacation homes were up 30 percent from 2019, according to the most recently available data from the Home Mortgage Disclosure Act.” Yales writes in Money that, “According to short-term rental platform Vacasa, Millennials currently account for 40% of vacation homebuyers, the largest share of any generation. [A year before], they made up just 31%.” She adds that, “First-time homeownership nationwide has been falling dramatically. In 2009, first-timers made up 45 percent of the home-buying market. By January 2022, they represented just 27 percent, according to the National Association of Realtors.”
Jackson quoted “real estate agents and industry observers” as saying that “a combination of rapidly rising home prices and pandemic work-from-home flexibility has prompted some hopeful homeowners to skip the first step — owning a primary home — and go straight to buying a second home in a more affordable location.”
I regularly help other Millennial couples with challenging housing and location decisions – either as their financial advisor or through a financial wellness program. So I love the hope that underlies these articles and this overall strategy. Many Millennials struggle to save for a down payment at a pace that aligns with their preferred homeownership timelines. And this issue only seems to get more fraught as home prices and mortgage rates keep rising.
But buying a house doesn’t become much easier even once Millennials have successfully saved a down payment. Limited housing supply and the fierce competition that results can create a frustrating, drawn-out homebuying process. The frustration can come in different forms, and at different times.
At first, an aspiring Millennial homebuyer might feel frustrated that he or she can’t improve upon their living situation. The most common examples I see involve parents who want to expand their space for a growing child or renters who have a difficult landlord. Over time, the frustration relates to another aspect of personal finance: wealth building. Millennials who feel behind on retirement or other long-term goals often view homeownership as the best way to build wealth. It’s no wonder, then, that some people would turn to a “second home” in a less expensive location to try to start building equity.
Neither Yale in Money magazine nor Jackson in The New York Times approached her article with much of a critical lens. Even so, their interviews with Millennials who have pursued this second home strategy still yielded some valuable insights.
Many people in the U.S. view homeownership so positively that we often overlook the disadvantages of owning a home. Jackson noted, “First-time buyers can face unique challenges when it comes to owning a home in a rural location, especially those more used to apartment living. [Dylan Beaumont, 33, who owns a house in the Catskills and rents in Manhattan] has a house on about 20 acres and, at one point, he and [his fiancee] discovered there was an underground oil tank on the property, which they had to have removed…. They’ve also had smaller headaches to deal with, like replacing the hot water heater, dishwasher and the washer and dryer.”
Another couple, based in Brooklyn but now “second home” owners on Cape Cod, “have to travel last-minute for contractor meetings and troubleshooting. One of the partners admitted to Jackson, “As first-time buyers, we had no idea what we were getting into.”
And most importantly from my perspective, Jackson acknowledged that these “first-time second home buyers” have learned to better appreciate the benefits that renting can offer. Dylan Beaumont, who I mentioned previously, said, “It’s opened my eyes to what a luxury renting is. It’s like, hey, my washing machine is broken. And a person just comes and fixes it.”
Renting doesn’t have a particularly stellar reputation in our society. At least compared to the “American dream” of owning a home, that is. But these articles about a potential second home trend offer great examples of why some Millennials still – even now! – can find such value in renting.
Even so, I wish Money and The New York Times would have included more caveats in their articles. In other words, more Millennials need to hear why the “second home” decision may only work for a very small percentage of our generation.
To me, the most glaring shortcoming relates to building wealth. As with many trend stories, these articles largely make second homes sound pretty alluring. In the context of building wealth, though, the authors fail to address other ways in which Millennials might effectively build wealth over the long term.
At one point, Jackson quotes a New York Times interview subject as saying, “We know that real estate is a great investment.” At another point, she writes, “For these buyers, it’s a strategic, win-win arrangement: They earn extra income, build wealth and have a property they can escape to whenever they please.” And Christian Wallace, the head of real estate services at Better gushes that, “Staying in their rentals, but at the same taking advantage of historically low interest rates to purchase a home and begin building equity seems to be the best of both worlds.”
Less significantly, but still notable, is the uncertainty that these somewhat speculative transactions involve for some second home buyers. One interviewee “plans to move to Florida within the next two years,” even though she currently lives and works in New York. In another case, homebuilders told a pair of Millennial owners that they expect a two-year timeline before anyone can actually use the house.
The Money and New York Times second home articles reflect the strong value that our society places on homeownership. This isn’t a new value. But its impact has become more damaging as Millennials have increasingly struggled to afford homeownership. And, ironically, the strong demand for homes actually has reinforced a value that does not receive nearly enough attention: the value of renting.
Many Millennials benefit from the significant flexibility and access to amenities that renting can offer. Some people need or want housing flexibility to move for work in a different location. Others need or want to be able to move closer to family. Life also changes in ways that we cannot or fail to anticipate. The life of the second home owner who plans to move to Florida in two years may change in significant ways over that time. A plan to eventually move so far away may sound reasonable right now. But she may not feel the same way in two years.
In an ideal world, homeowners would live in an area that is highly convenient for where they spend their time. This dynamic is often available to renters. Many of the Millennial couples whom I help can walk to work. They have beloved cafes, bars, and restaurants down the street from their apartment. But they can’t afford to purchase a home in that neighborhood. For them, becoming a homeowner would mean abandoning a lifestyle that they still very much enjoy.
These two articles also seem to promote homeownership as the preeminent wealth-building tool. This belief typically has roots in Baby Boomers’ experience with home price appreciation. Those members of our parents’ generation who were fortunate enough to purchase a home decades ago may indeed have accumulated substantial equity. Historically, though, as author Jonathan Clements notes, “The price appreciation of a house is pretty modest — about 1% a year faster than inflation. The S&P Index, meanwhile, “has returned a historic annualized average return of around 10.5% since its 1957 inception through 2021.”
Homeownership certainly may turn out to be an excellent investment for you or someone you know. But there’s also plenty of evidence to suggest that you may earn higher returns in the stock market. You also may earn a higher return on your time. After all, passive stock market investing doesn’t necessitate home repairs or addressing tenant demands. And, unlike home equity, a stock market investment remains accessible to you in a pretty short amount of time. Sometimes, owning a home is most useful for, well, just living in it.
I finished these articles wondering how many Millennials feel like a “second home” is the best new strategy for our current housing market. Sure, that may be true for some Millennials. But I’d rather focus on the articles’ conclusions that likely apply to many more people.
Yale wrote in Money, “Buying a vacation property in a less in-demand area is often a way to steer clear of sky-high prices while still investing in real estate (and the wealth it can help build over time).” Her comment reminds me of an important point. Some people, for various reasons, struggle to save money. And homeownership can act as a form of “forced savings” for those people. They make their mortgage payments. Over time, their equity should grow. And this money remains relatively locked away until a much later date.
Separately, Yale noted, “With this flexibility, many young buyers are looking for a change of scenery — somewhere to work when proximity to the office doesn’t matter.” Workplace norms continue to shift as a result of the pandemic. As a result, Millennials have the potential to restructure their personal finances in more than one way. A new housing decision can accompany a job change that offers better hours, better benefits, better pay, and/or more enjoyable responsibilities. I love that more Millennials have the option now to explore living situations that aren’t tied to a particular office building. But ideally, homeownership is only one potential piece of that puzzle.
Every category of personal finance has examples that suggest the existence of an easy, underutilized winning strategy. More often than not, you’re better off minimizing the unnecessary risk you assume. You also typically want to be wary of high costs and complicated exit options.
The U.S. housing market feels really daunting to a lot of Millennials right now, which is unfortunate. If you’ve identified a housing change that will improve your day-to-day life, then I encourage you to pursue that change. If this description doesn’t apply to you, remember that you have other options for building wealth. And remember that you can gain tremendous value from renting. A second home sounds nice to almost everyone. When you hear the phrase, you may think of a beach vacation or mountain retreat. But a “second home” doesn’t also have to serve as your financial savior.
So check out both Aly Yale’s article for Money and Candance Jackson’s article for The New York Times. And, of course, subscribe to this finance podcast for Millennials to learn more about how you can improve your financial wellness despite high housing prices, rising interest rates, and ongoing inflation.
[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]
Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.
You’re probably not making the most of your health savings account (HSA). Most likely, no one taught you that your approach is too narrow.
Your 2024 list of the 10 best independent financial advisors in Washington, DC
With money, as in art, focusing on what we can control may not be enough. We also need a little bit of luck along the way.