Much has been made of the lack of millennial homebuyers in the market, but many feel this group might be making waves soon. Since the Great Recession, employment numbers have been low, income gains modest, and debt and rent levels high — all while access to credit has been tight. This combination has kept young homebuyers out of the real estate realm. According to recent reports, however, some of these constraints might be loosening, but will these changes be enough to turn the tide?
Millennials make up much of the first-time homebuyer market, and their unemployment numbers have been less than encouraging in recent years. This past January, however, employment among 25- to 34-year-olds reached its highest level since the end of 2008, according to the Bureau of Labor. This, combined with pent-up demand and ever-increasing rents, likely will help move millennials toward purchasing a home.
Early signs indicate that 2015 might see a surge in home purchases overall, and particularly with first-time buyers. According to data from Redfin, in the week of Jan. 12, 57 percent of the home tours conducted by its agents were for first-time homebuyers, a significant increase from the 48 percent seen in the same week in 2014 and the highest rate recorded since the end of 2012.
Interest likely will continue to increase, but tours by first-time homebuyers won’t turn into sales if buyers are still unable to access financing. Since the financial downturn, tightened credit standards have been the norm as lenders zealously pursue fiscal responsibility through the simplest means. Because of this, lenders often look to serve only the upper tiers of potential homebuyers — those with high credit scores and significant down payments — as these consumers are perceived to present the least amount of risk. Millennials and other first-time homebuyers often fall shy of these standards, however, and many face credit challenges but will still be responsible borrowers.
According to industry experts, nearly 1 in 3 consumers has a FICO credit score below 640, and for the millennial generation, the numbers are even lower. Millennials (those aged 19-29) have a national average credit score of 628, the lowest score of any generation, according to Experian’s Fourth Annual State of Credit report. They also tie for the highest utilization of credit at 37 percent and carry an average of $23,332 in debt. Along with these challenges, access to financing is particularly critical for young and first-time homebuyers. In fact, according to the National Association of Realtors, 88 percent of buyers financed their home this past year, and this number increased to 97 percent for younger homebuyers.
These consumers can become homeowners, however, if they are able to partner with the right mortgage lender and a real estate agent who is aware of the latest changes in the mortgage landscape.
Despite the perceived risk, some lenders still want to serve the underserved market with well-managed programs tailored to fit this market’s needs. These lenders have responsibly lowered minimum credit requirements, extended eligibility to more property types and reduced overlays. Some lenders also offer simplified loans that have no lender closing costs for borrowers, which can be especially helpful for those who struggle to put together not only a down payment but also the cash to close.
Although these consumers might not be “perfect” borrowers on the surface, lenders with programs such as these can help bridge the financing gap and facilitate millennials’ entry into the market. Real estate agents who are working with first-time homebuyers and the millennial cohort should be on the lookout for lenders with programs such as these, so they can help lookers turn into buyers — and help these consumers make the dream of buying a home a reality.
In addition to programs offered by individual mortgage lenders, many national and federal organizations have recently changed their requirements to foster more first-time homebuyers. In December, Fannie Mae and Freddie Mac announced the launch of mortgage programs that allow for down payments as low as 3 percent. And in January, the Federal Housing Administration significantly lowered its annual mortgage insurance premium from 1.35 percent to 0.85 percent, depending on loan parameters.
If the early positive indicators hold out, 2015 could turn out to be a great year for the real estate market. According to Redfin, the median home price increased 7.6 percent year over year in January. In addition, home tour demand was up 62 percent from the same January period the year before, and signed offers were up 58 percent.
As more millennials and first-time buyers look to purchase a home, they will need access to loan programs developed to serve the underserved market and not just the top tier of conventional borrowers. Increased access to credit, along with the recent changes in down payments and mortgage insurance premiums, could bring about a significant wave of millennial buyers. Real estate agents reaching out to and working with these consumers will be vital to increasing the pool of first-time homebuyers, especially those who might still be hesitant about entering the real estate market.
Ray Brousseau serves as executive vice president of Carrington Mortgage Services.