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The Millennial Home Buying Speed Bump

millenials_splashThe Millennials: a generation of almost 100 million Americans born between the time period of the early 1980s and the early 2000s.  Currently the majority of this generation is in their teens and twenties.  Standing as the first generation to come of age during a massive technological shift to the point where technology has been integrated into the average American’s everyday life, this generation is closely studied in all aspects: behavior, job preference, attitude, and position in the economy.  The millennials have witnessed quite a few significant events in American history: the tragic attacks of September 11th, Columbine, Virginia Tech, and Sandy Hook shootings, and the crash of 2008 leading to the Great Recession.  Forbes refers to the Great Recession’s impact on the millennials as having “totally dominated their view of the economy in general”.  The New York Times notes, “Thanks to the 2008 economic crash, millennials know how fleeting wealth can be.  Their solution? For many, it is to acquire not more, but less”.

The millennials have been significantly affected by the economic events of 2008, and it is still felt today. The impact that the millennial generation has on the housing market in particular is a highly debated topic.  It seems that no one knows for sure whether this generation has a role in helping or hindering the housing market.  National Mortgage Professional recognized quite a few conflicting headlines in the past few months:  “with such headlines including ‘Why Millennials are Hurting the Real Estate Recovery’ (MarketWatch, May 12) to ‘Millennial-Driven Housing Boom Could Be On The Way’ (Time Magazine, June 28) to ‘More Millennials Leave Parental Nest, Without Lifting Housing Market’ (Trulia, Sept. 16) to ‘How Millennials Could Be Housing Market Heroes’ (USNews.com, Sept. 17), it is difficult to know if this demographic should be courted or condemned”.  The Millennial Generation is a huge potential market, but there are numerous obstacles standing in its way.  So the question stands: does the responsibility all lie within the millennial generation itself, or rather does it lie in the hands of lenders?

The Prospect of Marriage

Societal trends have changed significantly when it comes to the question of when to start a family.  The millennials are more likely to wait for a major life event such as getting married or having children in contrast to previous generations.  Mortgage Professional stated, “A rising share of young adults age 30 and under are putting off marriages, births, home purchases, car purchases, and relocation”.   These major life events typically spur large purchases, and certainly the purchase of a home.  MarketWatch reports that “the median age of first marriage is about 27 for women and 29 for men, according to the U.S. Census Bureau.  In 1950, it was about 21 for women and 24 for men…Because people are marrying and having kids at an older age, many young people might spend more years renting apartments and living in cities, before moving to the suburbs”.  Millennials have demonstrated a pattern of either moving back into their parents’ homes, or renting rather than going off and getting married.

The Rise of Rentals

Richard Sharga, Executive Vice President of Auction.com, an online Real Estate marketplace states, “The [25 to 35] age cohort…probably has had the hardest time recovering from the Great Recession… For the time being, we’re likely to see a higher percentage of households formed being rental households” (MarketWatch).  After witnessing the Great Recession of 2008, Millennials have lost a lot of trust in the financial service industry that the previous generations had when they were young.  Buying a home in the United States is no longer seen as a great investment.  Mass foreclosures and lender lawsuits certainly did not help the housing market’s case.  The use of rental properties may be more prevalent due to another societal trend.  Millennials like to move around a lot and try new cities before they finally settle.  A long term home investment in that case is not necessarily a wise one as a home investment typically requires the homeowner to be in the house for at least 5 years to make it worthwhile.  It is not guaranteed to be a moneymaker just because it is an investment.  It has to be utilized properly.  USNews reports the millennials “don’t feel like they want to be stuck in one place, they don’t want the burden of a property”.  Lastly, the idea of 20% down on a home is a monumental hurdle for millennials, especially with the burdening combination of a weak job market and heightened student debt.    A post by the New York Federal Reserve noted that the top reason renters gave for not buying a home was that either they did not have enough money saved, or they had too much debt to take on a home mortgage.

Student Debt

The grips of student debt got to this generation way before any of them were even thinking about purchasing their own home.  The millennial generation is very concerned about how much they have achieved in life, and use higher education as a platform for these achievements.  This generation has been taught that higher education levels translate into higher income, so this generation is highly educated.  But that does not come without a price, quite literally.  Student loan debt has officially surpassed $1 trillion in the United States.  MarketWatch reports, “People with student loan debt also have more education, which should pay off in higher incomes in the future and make them great mortgage applicants, said Trulia’s Kolko. But when they’re first starting out, having more student loan debt makes it harder to get a mortgage and paying loan installments each month makes it more difficult to save for a down payment”.  MarketWatch notes that in 2012 1.3 million students who graduated from 4-year colleges (or 71%) had student loan debt.  That same year, graduating seniors had average debts of $29,400, up 25% from $23,450 in 2008.

National Mortgage Professional states, “Irvine, Calif.-based John Burns Real Estate Consulting issued a report stating that the onerous burden of student loan debt among Millennials will result in the loss of 414,000 home purchasing transactions this year. The company estimated that if the typical price of a house is $200,000, the lost volume would equal $83 billion per year. This research follows the much-discussed study from earlier this year by the Federal Reserve Bank of New York that found college graduating Millennials with student debt are less likely to own a house and a mortgage than those that never attended college”.  If that is indeed the case, than higher education has officially replaced a home mortgage as the single biggest investment most Americans will make in their lives.  Since student debts are equivalent to a mortgage for many recent grads, the idea of buying a house simply does not seem like the best investment, as it needs to be put off until the student debt is resolved.  In the meantime, those ‘potential’ borrowers are losing tons of money in home equity than if they purchased a home earlier in their lives.  The delay in buying a home does not come without a price.

The Job Market

Millennials were hit the hardest by layoffs and job shortages that resulted from the Great Recession.  They are simply not making as much as other generations were at their age, and they have less money saved, thus making the hurdle of a down payment nearly impossible as home prices rise.  Forbes made a statement about what the media is saying about the millennial generation and the job market: “Many media reports about Millennials’ economic prospects have focused exclusively on how the Great Recession is likely to reduce their average earnings for many years to come, no matter how much the economy improves. This is probably correct. It’s also true that the majority of Millennials looking for work have as yet been unable to find secure and salaried careers—leading to lives that are literally on hold.” “Leading to lives that are literally on hold” is a great way of putting it.  In the past Americans had a fully mapped out path: go to school, get a degree, settle down, get married, buy a house, and have children.  However the economy has paved a different path for millennials, and has seemingly caused them to “hold out” on major life events such as buying their first home.  MarketWatch reports, in April 2014, the unemployment rate was 6.3% for all ages.  That same month, the unemployment rate was 9.1% for persons age 18 to 29, which rises to 15.5% if you include those who have given up looking for work – more than twice the national unemployment rate.

Inventory and Lending Standards

Small inventory and strict lending standards have made it extremely difficult for everyone to purchase a home recently, let alone millennial home buying.  Millennials find themselves with a lack of savings and excessive student loan debt, making them risky borrowers in the eyes of a lender, and lenders haven’t done anything to target first-time millennial home buying, in fear of it not being up to par with today’s regulations.  “There is not a loan product out there that lends itself to the situation that Millennials find themselves in…We may see a non-bank lender try to fill that void with a product that does not fit nicely into the QM box. But we won’t see that product in any big numbers due to regulatory concerns the absence of secondary market opportunities (National Mortgage Professional)”.

Unless a product is made to specifically cater to this group of people, it is unlikely that much change will be observed any time soon.  Not only does the product need to pose minimal risk for the lender, but it also needs to pose minimal risk to the borrower.  Forbes reports that the millennials are more risk-averse than previous generations: “they have the most conservative portfolio selection of any age bracket under age 65. And economists Lisa Dettling and Joanne Hsu find that Millennials are actually less likely to have credit-card, auto, or housing debt than Gen Xers were at the same age”.  This generation is incredibly concerned about the financial picture they paint due to their first-hand account of the Great Recession.  The moral of the story is that something needs to fundamentally change in the housing market.

Brittany Williams is the Director of Marketing for Broadview Mortgage Corporation in Orange, CA and writes independently about the mortgage industry for the Broadview Mortgage Orange Blog. Brittany can be reached by e-mail at brittany(dot)willaims(at)broadviewmortgage(dot)com.

This article originally appeared on http://broadviewmortgageorange.com/millennial-hom…ing-speed-bump/

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