In May, REALTOR Magazine announced that “for the first time in a decade, more new households chose to buy a home rather than rent one in the first quarter of 2017, according to the Census Bureau.” Is this the news the housing industry has been waiting for? Are Millennials at last making their move?
Maybe. But the news came in the wake of a sobering study by Freddie Mac in March 2017, which concluded that renters, particularly Millennial renters, seemed set to continue renting for the foreseeable future.
For lenders and Realtors, the situation is both promising and frustrating. As the largest cohort in American history, Generation Y is crucial to the continuing health of U.S. housing and its allied industries. Yet despite REALTOR Magazine’s sunny outlook, they continue to lag behind their predecessors in their rates of home ownership. Lenders and Realtors can work together to change this.
Their mission is to persuade Millennials of the value of home ownership, reassure them about their ability to qualify and provide the tools and means to successfully achieve it.
It’s generally agreed that the economy’s future health depends most of all on the behavior of the largest generation in American history: Millennials. Their consumption patterns have been eagerly analyzed by every business sector, but for many traditional industries the resulting conclusions are not very comforting.
Unlike previous generations, members of Generation Y are less likely to own cars, to marry and especially to own homes – the traditional milestones by which American consumers measure their personal success, and in doing so, revitalize the U.S. economy.
For both lenders and Realtors, this sluggishness is baffling. As reported by Realtor.com in May 2017, the median price of a first home is $182,500, the median household income needed for first-time homebuyers is $72,000 and the median age of a first-time homebuyer is 32.3. With interest rates expected to rise, it would seem to be the perfect time for many Millennials to invest in a home.
However, the situation warrants deeper analysis. Millennials with the most stable jobs tend to be those living in urban areas, thriving job markets where home prices are highest. Although their paychecks may be impressive, they’re often coping with student debt, credit-card debt and a lifestyle that values travel, adventure, group activities and other social commitments that drain their disposable income. There’s a post-recession dread that good times and good jobs may not last, discouraging long-term planning. And the interest rate on savings continues to be low, disincentivizing the steady accumulation of spare cash. In Freddie Mac’s report, 69% of Millennials agree that “renting is a good choice for me now.”
Renting may work for them in the short term, but economists agree that with the housing supply at its tightest, rents are on the rise for the foreseeable future. However, when asked what they would do if they faced a rent increase, 46% of Millennials surveyed in the Freddie Mac study said they would cut down on “nonessential expenses.”
Even though 45% of Millennial respondents are paying more than a third of their income in rent, 67% view renting as more affordable than owning. One in five renters says they have no interest in ever owning a home. This is a cohort that simply does not see homeownership as the solution to rising rents.
It’s clear that the existing Millennial problem is being compounded by the rise of the “lifestyle renter.” What is needed is a compelling way to make home ownership a valid and sensible alternative to renting, one that harmonizes with millennial preferences and preconceptions.
HOME-BUYING EDUCATION AND AFFORDABLE FINANCING OPTIONS
Combating the lifestyle renter and persuading Generation Y to buy into home buying on a large scale demands a two-pronged strategy.
Education: The lack of awareness or forward-thinking among Millennial renters is one issue. Rents rise; landlords sell their properties, convert them to condos or move in themselves; a singleton could suddenly find themselves with a family and the need for more space. Campaign to impress upon these lifestyle renters that circumstances change and a stable residence with a reliable monthly payment can be vital to ensuring their financial security and achieving their long-term goals.
The next hurdle is convincing these potential home buyers that owning a home is neither an impossible dream nor a financial trap. Explaining the process in simple terms, offering real-life, affordable financing solutions and making each step easy should be priorities for both lenders and Realtors.
Reach out to Millennials where they live, on the Internet: Any first-time homebuyer program should run in tandem with a robust social media campaign that works across devices and platforms.
- Engage Generation Y clients with real-life stories and testimonials
- Capture their attention with videos, photos and interactive features rather than simply web pages of text.
- Promote a can-do mindset among borrowers that will be met with a can-help attitude from loan officers and the Realtor team.
Bring them into the community. For many Millennials, a bank is the place with the ATM outside. Lenders can change that viewpoint by rebranding their institutions as a one-stop community resource for first-time homebuyers. They can partner with a local food retailer – Starbucks, etc. – and entice potential borrowers with:
- Educational seminars that take would-be purchasers step by step through the process.
- “Meet and greets” featuring real-life homebuyers in the community who can share their experience with affordable loan programs.
- Presentations by local Realtors to highlight different neighborhoods, types of homes and the relative affordability involved.
Affordability: Lenders are well-positioned to offer practical solutions on a local level with first-time home buyer programs like Fannie Mae’s HomeReady or Freddie Mac’s Home Possible or through their own in-house loan programs tailored to this market. The loan programs and down payment assistance programs offered by state and city housing finance agencies are another option for the Millennial borrower.
These programs’ more flexible underwriting guidelines accept expanded ratios, lower credit score requirements and accommodate special circumstances, such as multi-generational households. The obstacle of small down payments can be tackled by working with private mortgage insurers, which offer their own set of flexible guidelines directed at the first-time buyer. Mortgage insurers can also help with portfolio lending programs aimed at Millennials, a generation that doesn’t necessarily check all the boxes on the average home loan application.
The FHA is a popular option, but its restrictive mortgage insurance (generally for the life of the loan) may not make financial sense for some homebuyers. Private mortgage insurance on a conventional loan is automatically cancelled when a borrower’s equity reaches 78% of property’s original value (and borrowers may request cancellation when equity reaches 80%).
Arch MI offers a free toolkit, Roadmap to Home Ownership (RtHO), that can be used by both loan originators and Realtors to work with Millennial renters. It consists of a set of customizable presentation materials that lenders can use to organize and promote their own in-house home-buying seminars in cooperation with local Realtors. It explains the home-buying process in straightforward, step-by-step language that includes easy calculations for down payments, credit scores, debt-to-income ratios and other important components.
A steady supply of first-time homebuyers is critical for the long-term health of the housing market, so the participation of Millennials is essential.
Homeownership has always been a challenge for first-timers, but by choosing affordable, responsible home ownership they can help to secure their future. Despite the plunging home values of 2008-2009, actual declines in property prices were short lived in most areas.
As Ralph DeFranco, author of Arch MI’s Housing and Mortgage Market Review, points out, “With future interest rates increases set to hurt affordability … the sooner someone who is willing and able to make the jump from renting to owning, the better.”
