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Millennials have redefined the American Dream

The Street logo The Street 5/6/2017 Jason Notte

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Video by The Wall Street Journal

Millennials haven't given up on the American Dream: their expectation of it has evolved.

According to a Bank of the West study, millennials (18-36) still view the American Dream as owning a home, paying off debt and someday retiring from a fulfilling career. However, they've amended it a bit to include travel, pursuing their passions and living abroad. It's an American Dream that doesn't all take place in the U.S., and it requires significant capital to back up.

"Millennials dream of living abroad, moving to a new city and switching careers, but in reality they are quite satisfied with stability," says Paul Appleton, executive vice president of consumer payments and product at Bank of the West. "It's an interesting dichotomy that doesn't appear with Gen-Xers or boomers. This generation is dreaming bigger and better, and while they are confident they'll fulfill their dreams, they need help figuring out how to fund them."

With more than 6 in 10 millennials believing the American Dream is still alive today, they're largely in agreement with older generations about what it looks like. Being happy (70%), owning a home (60%), being debt-free (55%) and retiring comfortably (51%) are all key elements of it, but that isn't the complete picture. The overwhelming majority of millennials (85%) say it's important to have the flexibility to move when they want, with 67% saying would like to live abroad at some point in their lives and a third of this group can seeing themselves building living in another country for the long term.

But there's a reason that the American Dream has that name: It's still a largely aspirational concept. Currently, millennials only envision themselves packing up and moving to a new city, state or country fewer than two more times in their lives. Most (68%) even say they would prefer to build a life in one community, rather than live and work in multiple geographies. At this stage, 43% of millennials have bought their homes, while 75% of non-homeowners say they could be motivated to buy a house.

As a result, millennials helped make first-time homebuyers 32% of all homebuyers in March. That's the highest percentage of first-time homebuyers during that month in three years and follows a 2016 housing market in which 35% of homebuyers were first-timers -- up from 30% for all of 2015.

"Realtors in most markets are saying interest from first-timers is up this year, but competition is stiff for listings in their price range," says National Association of Realtors president William E. Brown, a realtor from Alamo, Calif. "The best advice is to lean on the guidance of a realtor throughout the home search and be careful about stretching the budget too far."

Low mortgage rates deserve some of the credit for that surge, but they're climbing quickly. According to Freddie Mac, the rate for a 30-year, conventional, fixed-rate mortgage sat at 4.03% by the end of April. That's down from 4.3% in March but higher than the 3.59% at the end of last April.

Also, while all-cash sales were 23% of all existing-home transactions in March, individual investors paying cash accounted for less than 15% of homes in purchased in March. As a result, first-time homebuyers aren't buying homes to flip them, but to stick around a while.

A survey by TD Bank took a look at these young homebuyers and found that 65% planned to purchase their first home with cash or savings. Of that group, 33% plan to pay it off over a 15-year mortgage. However, 17% of those homebuyers haven't set aside money for unexpected repairs and costs, while 44% of millennial homebuyers ran into $5,000 in unexpected costs during the mortgage process. While 74% of young potential homebuyers are saving up for their home, 65% say that saving for a down payment is an obstacle to home ownership.

"It's encouraging to see millennials thoughtfully prepare to enter the housing market," says Scott Haymore, head of pricing and secondary markets at TD Bank. "With today's affordability programs, owning a home doesn't have to be a dream, it can be a reality."

That's not exactly great news. Adjustable-rate mortgages and low down payments enabled many of the wost behaviors we saw during the housing crisis. Meanwhile, a seller's market has been driving up existing he median existing-home prices for four and a half years and put the average U.S. home price in March at $237,800, up 6% from the same time last year. During that same span, housing inventory slipped 6.6% to 1.83 million. The current 3.8-month supply is well beneath the six-month supply typically deemed healthy.

As a result, 19% of millennials plan to ask friends and family for financial help on top of their savings, while 65% will have a spouse or partner as a co-signer. They also aren't looking for fixer-uppers, with move-in-ready homes the preferred choice for 78% of all millennial home buyers

"The costs of running a household can be a shock to new home owners," Haymore says. "Monthly expenses for utilities, homeowner's association fees, cable and internet, can add up quickly. Factoring these in at the beginning of the mortgage process can help borrowers assess their overall budget and determine a realistic monthly mortgage payment."

Though three-quarters of millennial homebuyers have made mortgage rates their key financial concern, budgeting and right-sizing their first homes might deserve greater priority. According to TD Bank, a third of all homebuyers are putting less than 20% down on a home. That 20% down payment was viewed as a minimum as the U.S. emerged from the housing crisis and is still viewed as a sound benchmark. However, roughly 35% of millennials can't hit that mark as a result of student loan debt, the financial crisis's impact on their careers and other issues. While 37% of millennial homebuyers will attempt to secure mortgages that don't require as much cash up front, voices within the housing market suggest that maybe they should adjust their expectations.

That's going to be tough, with the Bank West survey nothing that 48% of millennials feel they would need to switch employers every few years to be paid what they feel they're worth. However, 65% say they are happy working for their current company, while 79% say they wouldn't quit their current jobs to pursue another career and 62% would not move cross-country without a new job offer in hand. Asked whether they'd prefer a fulfilling family life or a fulfilling professional life, more than three-quarters (78%) of millennials would put their family life first. In fact, the majority (64%) say they sometimes feel stuck in the life they have.

The common thread running through all of that is an overarching sense of caution. After the recession, millennials gravitated toward low-risk strategies, with most (76%) saving in cash or checking and saving accounts. Only 17% say they were investing on their own and less than one in 10 (7%) were using an advisor.

Despite all of this, 85% say they are confident that they will attain their American Dream. Roughly 67% think they have more opportunity to be successful than their parents had. They see opportunity (80%), not innate ability (20%), as the key to reaching their goals, though only 49% have a financial plan in place.

"Millennials have high expectations for their personal and professional lives, and are driven and able to accomplish the goals that they've set out for themselves," Appleton added. "They want the choice and flexibility to make their own decisions — whether it is to build a new life in a foreign country, navigate a career change to pursue their passions, or buy a home and raise a family. By putting a financial plan in place, millennials can ensure they have the means to build the life they want to lead."

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