The Gradual Millennial Migration Into Homeownership
When it comes to housing, the experts have examined the Millennial demographic with a mix of excitement, curiosity, and befuddlement. Millennials, a term that is often used to define today’s 25- to 34-year-olds, are not well understood (yet) by lenders and brokers.
An overwhelming majority of Millennials who are renting (an estimated 91 percent) have indicated plans to own a home at some point in the future.
According to recent data from Fannie Mae’s National Housing Survey™, compiled by the company’s Economic & Strategic Research (ESR) Group, many Millennials who are currently renting homes say that it makes more sense, financially speaking, to own a home than rent.
“So although they haven’t been achieving homeownership at the same rate as their predecessor generations, they still express a large preference for homeownership,” says Patrick Simmons, director of strategic planning and business strategy for ESR.
The Kinds of Homes
When it comes to the kinds of homes Millennials are targeting, there is a slight misperception that they prefer “dense multifamily living,” says Simmons.
“When compared with the preceding generation, if they’re able to make that step into homeownership they are actually just as likely, or even slightly more likely, to choose a single-family home,” says Simmons.
Some advantages of a single-family home — one that includes one to four housing units in the building — are the privacy and space it can offer. And that stock is widely available: Single-family homes account for 90 percent of the nation’s owner-occupied stock, notes an ESR report.
The single-family home is already popular with young renters (52.4 percent of 25- to 34-year-old renters lived in a single-family home in 2013). When it comes to purchasing these homes, Millennials have shown a preference for homes that are smaller, older, and cheaper. Fewer than 9 percent of Millennial homebuyers purchase a new home, writes Natalia Siniavskaia on EyeOnHousing.com.
The single-family home’s rise in popularity may be the result of tightened credit standards, which “might have shifted the distribution of young homeowners toward more affluent households,” says Simmons.
“However,” adds Simmons, “the proportion of young homeowners who purchased single-family homes remained stable or increased between 2006 and 2013 regardless of income.”
The Cost of Living “Single”
When it comes to affording a home and having the requisite—or minimum—amount of money to make this a reality, Millennials may not be prepared just yet. The demand for starter homes is being stripped by a limited supply and high prices.
The price of a U.S. single-family home also rose in August—5.1 percent on a year-over-year basis, reports Reuters.
“One result is that a 5 percent price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher,” says David M. Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices, in a recent statement.
First-time homebuyers are renting longer and buying older. The average age of first-time homebuyers is 33, and their median income is $54,340, according to a report from Zillow.
Despite these numbers, interest in owning a home remains strong among Millennials, which makes it important that lenders and brokers understand how to reach this age group and engage them.
Using Technology to Reach Young Customers
Millennials pose an interesting challenge for lenders.
Millennials matured during the recession and are not entirely trusting of traditional financial institutions such as big banks, according to a report from the Pew Research Center.
“What we need to remember is that nearly all Millennials heard about someone who was foreclosed upon, or experiences it firsthand in some way,” says Garth Graham, senior partner of the Stratmor Group.
Millennials also prefer the fast and simple way of dealing with things like signing up for credit cards and mortgages online.
One way for lenders to build relationships with Millennials is through technology, writes Jeff McGuiness, chief sales officer for Embrace Home Loans, in a blog post for MortgageOrb.com.
“Mortgage lenders must implement new, innovative technologies to revolutionize the lending process. This includes solutions that can speed underwriting and expedite document collection,” adds McGuiness.
Lenders should also consider combining new technologies with face-to-face interactions with new clients to ensure future success and to “address the evolving consumer preferences of the particular market segments they serve,” says Steve Deggendorf, director, business strategy & economic strategic research at Fannie Mae.
New startup Social Finance, or SoFi, offers educational tools and mortgage loans that potential (and tech-savvy) homeowners can apply for online, offering potential customers a faster and more convenient process.
There are also mortgage products and enhancements that will help Millennials in the homebuying process, says Graham.
“Down payments can be a challenge, and that can be addressed through many of thousands of local and state down payment assistance program options,” he says.
Real estate agents are also emphasizing technology in working with potential new homeowners, as more than half of Millennial homebuyers used the web to find the home they would eventually purchase, reports Inman (and 88 percent of homes purchased in 2014 were through a real estate agent).
In the long run, many more Millennials are likely to become new homeowners, says ESR’s Simmons.
“Young Millennial renters still have a very favorable view of homeownership, and they think that it makes more sense than renting from a financial and lifestyle perspective,” says Simmons.