The patterns of millennial behavior have been in the spotlight in the media for a long time now. There has been a lot of talk recently about how they handle their money, saving, spending, and renting.
One of the few really powerful articles was by Foundation Capital which surveyed millennials to find out (1) they use financial products like everyone else, (2) they're in a lot of (student) debt, and (3) they're good with apps.
To be fair most of the coverage has been pretty unsettling.
Most interesting was an article published a few days ago on Bloomberg that exposes an nerve-racking fact about millennials living in big cities. Most millennials are looking forward to buying homes, but they aren't saving nearly enough money for an average down payment. This reinforced an early perspective offered by The Atlantic.
Of course, the amount needed for a home varies from city to city — San Francisco having one of the highest and Portland among the lowest — but young people generally want to live in these high cost areas.
At the current pace it would take the average millennial over 25 years to get to a down payment in SF. At that point they're more likely to be looking at retirement homes than starter homes.
One thing's for sure: they're in a tough spot.
There is a stereotype that millennials are not smart with their money and they spend more than they earn. However, if you dig deep into the data you can see a different explanation as to why they're not saving for a home or retirement: student debt and a sagging economy.
So let's take a look at how this adds up:
- A 30 year old today makes the same amount today as a 30 year old did in 1984, despite both the fact today's 30 year old is 50% more likely to have a college degree.
- And that college degree cost them 56% more than it did 10 years ago, so they're servicing a lot of student debt.
- Oh, but you have to have a college degree because the earnings gap between high-school grads and college grads is 20% higher now than it was in 1979.
So is it really a surprise they're not able to save for a down payment or retirement?
What's happening? Friends and Family.
As a result of this tough calculus, more and more millennials are turning to friends and family as a way to afford that first home.
It's not so much that they want to, it's that they probably don't have a lot of other options. When you're already paying 5% on your student loan, what kind of mortgage rate could you get?
As the Fed pointed out in it's most recent survey: financing from friends and family contributed 18% of the total funds used for down payments over last few years. That more than double the amount it was in 2005–2007!
Despite its rising popularity, lending to and borrowing from friends and family can be tricky. But as we pointed out, it's becoming more of a necessity for millennials these days.
We wanted to make it as safe and easy as possible: that's why we built Frank. It suggests a socially appropriate interest rate so you don't have to negotiate, it automates payments so you don't have to remind or be reminded, and it can intelligently facilitate if something goes wrong.
Because when you do the math we shouldn't be castigating millennials, we should be figuring out how to help.
We hope we can. We hope you will too.