The Secretary of Housing and Urban Development (HUD), Julián Castro, said last night at a panel event that his team is working on easing the way for more first homebuyers to buy condominiums.
Buying a condo is currently quite an onerous task for borrowers because condo buildings are perceived as more risky, but their lower price ranges can often be a good way to get on the property ladder.
Speaking at the “Millennials and the Housing Market” evening last night organized by realtor.com and hosted by the George Washington University, Castro said, “Every time I meet with Realtors, I hear about the condo rule that we need to get done.
“I have said before that that’s on our agenda. Folks are working on that (at HUD), and we anticipate we will make a process, which will hopefully be a positive contribution to open up homeownership possibilities.”
Good for millennials, first-time buyers and first-time millennial buyers
This will be good news for both millennials and first-time homebuyers, a population segment comprising 70 percent millennials, said realtor.com chief economist, Jonathan Smoke.
“It is a topic that I think is clearly a very important one. [Castro] sounded pretty positive that it was a priority,” said Smoke, speaking after the event.
“The requirements related to getting financing on a condo are overdone and fairly difficult. If it’s in urban areas, a condo is the one logical first place for the entry-level buyer,” he said.
“It’s not something that can just happen overnight. There’s a reason why it became more difficult to buy a condo,” he added.
Access to credit and affordability
HUD is also taking steps to help two key challenges for potential homebuyers: access to credit and affordability, said Castro.
“What the Federal Housing Administration is doing is fundamental to ensure that we keep safeguards in place but we also want to open up the credit box to folks who are responsible buyers so they are able to get access to credit,” said Castro last night.
Castro was congratulated by Smoke for the Federal Housing Administration lowering its mortgage insurance monthly fee back in January, which will save the average homebuyer $900 a year.
“We saw a 30 percent change in the market share of folks using FHA,” said Smoke. In September, 37 percent of millennial mortgages were secured through FHA.
Smoke said there was space for more change.
“FHA has two fees of insurance, one charged at closing and the other monthly. It was the monthly fee that was reduced,” he explained.
If the other fee was lowered, it would make FHA mortgages more competitive, said Smoke.
Creating wealth through homeownership
Castro also took pains to point out the wealth gap that exists in the country at the moment.
“For generation after generation, the primary vehicle to create wealth in our country has been homeownership, and the homeownership rate today is the lowest in 48 years.
“We don’t need to go back to where we were before, but we do need to have sensible strong policies in place that offer good opportunities for responsible buyers.”
Lending to African-American and Hispanic buyers is at a 13-year low, and those population demographics are growing rapidly, he added.
The realtor.com chief economist, meanwhile, called out the mortgage industry for old-fashioned credit scores that millennials have to produce, which don’t take into account their regular payments of rent, utilities and cell phone payments.
“I would argue that there are fundamental issues for young households — we are still using a credit score process that was defined when many millennials weren’t alive.
Limited credit history
Their limited credit history can so often get in the way when attempting to get pre-approval.
Traditionally, lenders using FICO 4 look at credit card history and loans from department stores.
“Banks don’t look at regular payments like cell phone bills,” said Smoke. “They don’t fit into the category. Yet that is the thing that young households have.”
There are other credit scores, like FICO 9 and VantageScore, that do a better job, he said.
Documentation of income is another hurdle to younger borrowers, he said. Anybody who is self- employed can struggle to win favor with lenders.
“That applies to Realtors, doctors, lawyers — people who have good incomes, but who are just not in the position to prove three years of work history.”
Down payments: the final hurdle
Down payments were another key topic discussed by Castro and Smoke. Whereas 20 percent down payment is the ideal, it is rare among millennials, with their student debt to consider, they agreed.
According to Smoke, among the millennials of this year’s mortgage market, their average down payment is 7 percent. Millennials getting their mortgage through FHA were typically putting down payments of 4 percent.
The HUD Secretary encouraged young homebuyers to talk to one of the Department’s many housing counselors about that they could reasonably afford and what their responsibilities would be as homeowners as part of the Blueprint for Access to Credit for American Families.
Affordability crisis — for renters
Another crisis looms on the near horizon, meanwhile, said Smoke.
“I would argue that we are in the beginning stages of what is an affordability crisis, but more for renters than buyers,” said Smoke.
If you are paying 30 percent or more of your income on rent plus all your other responsibilities of debt, it makes it impossible to save for a deposit. It becomes a trap, he said.
“To break out of the trap is to own a home,” he said. And so the cycle goes.
Some millennials are managing to overcome all the barriers of student loans, high rent and access to credit. Just under half of millennials are looking to buy their first home over the next two years, said Smoke.
And they are doing it somehow.
“Two percent of millennials bought a home this year. And that 2 percent are really having an effect on the market because they are getting the incomes,” said Smoke.
Millennials are getting a lot of the new jobs — 719,000 jobs created in last 12 months were for 25- to 34-year-olds, said realtor.com.