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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2017

Why Homes Are out of Reach

Getting millennials back on track requires affordability and education

Why Homes Are out of Reach

The United States entered 2017 with an economy still sluggish in the aftermath of the largest recession in decades and business outlooks reflecting uncertainty about the direction the new presidential administration might take. One thing remains clear, however. The economy’s future health depends most of all on the behavior of the largest generation in American history: Millennials.

This generation’s consumption patterns have been analyzed by every business sector, but for many traditional industries the resulting conclusions are not comforting. Millennials are less likely than previous generations to own cars, to get married and, especially, to purchase homes — the traditional milestones by which American consumers measure personal success. But that is exactly what is needed to revitalize the U.S. economy. 

For a mortgage industry still floundering after the housing crisis, the concern over millennials is acute. This past December, the real estate website Trulia reported that “almost 40 percent of young Americans were living with their parents, siblings or other relatives, the largest percentage since 1940.” In picking up the story, The Wall Street Journal observed that “the trend r uns counter to that of previous economic cycles, when after a recession-related spike, the number of younger Americans living with relatives declined as the economy improved.”

With millennials bucking a well-established trend, there has been far less demand for housing than would have been expected by such a large generation of young people. In fact, according to the Harvard Joint Center for Housing Studies, even though the under-30 population has increased by 5 million in the past 10 years, young adults have formed only 200,000 households in that time.

When it comes to buying homes, millennials are collectively sitting it out. What’s the reason for this apparent indifference? How can it be reversed?

Societal issues

Some observers attribute the reluctance of millennials to join the ranks of homebuyers to societal changes. Remaining in the parental household no longer carries the stigma it once did, and many of today’s parents are far more accommodating than those of previous generations.

Immersed in a digital environment from birth, millennials care more about owning a smartphone than a home. They appear committed to mobile lifestyles and the freedom to take advantage of educational, travel and job opportunities worldwide — a freedom that might be compromised by ownership of a large, static asset tethering them to a specific location. Underlying all these behavioral trends, however, is a solid economic rationale.

Millennials have had to contend with an economy with fewer jobs and lagging wages. The employment market is becoming increasingly divided between the high-skilled and low-skilled, with the middle class dwindling in between. The best way to increase wages and graduate to the ranks of the highly skilled is through further education, but this usually adds to the substantial student-loan debt already accumulated by many in this generation.

Millennials also must constantly reassess skills and job security. The pace of technological change and free trade threatens stability in many industries and regions. Homeownership depends on the possession of a solid middle-class job for the long term.

The current housing market itself can be a discouraging prospect to a millennial homebuyer. Home prices hit record highs at the end of 2016 and are only expected to increase, with the inventory of single-family homes for sale remaining tight in many cities across the country.

According to the Winter 2017 edition of the Housing and Mortgage Market Report (HaMMR) published by Arch MI, U.S. home affordability is actually one-third better than it was 10 years ago, but home prices are still rising faster than incomes, especially in those markets with solid employment opportunities. Moreover, interest rates are expected to rise, adding to mortgage costs.

Complexity issues

Apart from economics, the complexity of buying a home also remains a significant barrier. The homebuying process has always intimidated anxious borrowers, with its formidable array of paperwork, approvals and confusing terminology.

The mortgage process is particularly unattractive to millennials, who value informality and authenticity, have a “cut to the chase” mentality, like their information delivered in simple bite-size nuggets that speak to their immediate concerns, and prefer online transactions that personalize the process and prioritize their individuality. They’re also highly responsive to “Influencers,” defined as “people like me” whose stories, testimonials and real-life encounters with a given issue or life decision resonate with this generation.

In addition, new regulations and restrictions intended to protect consumers and enhance transparency have resulted in stricter underwriting guidelines. For millennials, often burdened with student debt and managing on starter incomes, it can be difficult to qualify for conventional loans. Even when applying for loans through the more lenient first-time homebuyer programs, they find it stressful to realistically evaluate their own economic circumstances and practice the self-discipline necessary to improve their credit scores and amass a downpayment.

Overall, millennials are effectively shut out from homeownership.

Complementary solutions

Getting millennials to buy into homebuying on a large scale demands a two-pronged strategy. The issue of affordability is central, but mortgage originators also should embrace a long-term commitment to educating millennials about the home-buying process and the value of homeownership.

Obviously, originators can do little about the U.S. economy’s structural problems on a practical level. They are well-positioned, however, to offer solutions through first-time-homebuyer products like Fannie Mae’s Home-Ready or Freddie Mac’s Home Possible programs, or through their lender’s in-house programs tailored to this market. Downpayment assistance programs offered by state and city housing-finance agencies are another option for millennial borrowers.

The underwriting guidelines of these more flexible programs accept expanded debt-to-income and/or loan-to-value ratios and feature lower credit score requirements. They also accommodate special circumstances, such as multigenerational households.

The obstacle of small downpayments can be tackled by working with private mortgage insurers, which offer their own sets of flexible guidelines directed at first-time buyers. Mortgage insurers also can 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 Federal Housing Administration, or FHA, loan-guarantee program also is a popular option, although its restrictive mortgage insurance that lasts 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 the principal balance on a borrower’s loan reaches 78 percent of the property’s original value and borrowers may request cancellation when the principal balance reaches 80 percent.

Although affordability is the key, many millennials remain unaware of the possibilities available to them, which is why education also is necessary. Publicizing the existence of real-life, affordable solutions and making the homebuying process easy need to be priorities for lenders, mortgage companies and originators.

Reach out to millennials where they live: on the internet. Any first-time homebuyer program advertising should run in tandem with a robust social media campaign that works across devices and platforms. Those campaigns work best if they do the following:

  • Engage millennial borrowers with real-life stories and testimonials of their peers who have successfully achieved homeownership in their local areas;
  • Capture their attention with videos, photos and interactive features rather than simply web pages filled with text; and
  • Promote a can-do mindset among borrowers that will be met with a can-help attitude from your originators.

It also is important to bring millennials into your community. For many millennials, a bank is the place with the ATM outside. Change that viewpoint by rebranding your institution as a one-stop community resource for first-time homebuyers. Partner with a local café or coffee shop and invite young people to attend free homebuying sessions. Here are a few ideas:

  • Educational seminars that take would-be purchasers step by step through the process; 
  • Meet-and-greets with real-life homebuyers in the community who share their experience with affordable loan programs; and
  • Presentations by local Realtors to highlight different neighborhoods, types of homes and their relative affordability.

Business benefits

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. Converting millennials into homeowners benefits everybody: borrowers, lenders, allied industries, current homeowners trying to “move up” to bigger homes or “downsize” for retirement, communities and the overall economy.

With home prices going up, along with interest rates, affordability will continue to be the watchword of this generation. Homeownership always has been a challenge for first-timers, but by offering affordable, responsible homeownership, originators can help millennials secure their future.

If affordability is the fulcrum, education is the grease that turns the lever. An educated homebuyer is more likely to understand the value of homeownership and, by actively reaching out to educate these potential homebuyers, lenders and originators can help to assure their own futures.


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