Millennials are those born between 1981 and 1996. They are ages 22 to 37 in 2018. Anyone born from 1997 onward are actually not Millennials, just to be clear, they are part of a new generation called Generation Z who are younger than Millennials, per PewResearch.org.
Millennials – 2019’s New Homebuyers?
And this article is about Millennials. In 2015, only 32 percent of millennials owned a home, according to a 2018 Millennial Homeownership Report from the Urban Institute. They have a reputation for shunning homeownership.
Will this change in 2019? Perhaps so, here are reasons why:
- While interest rates are rising, housing prices are expected to stabilize, offering additional affordable options to first-time homebuyers.
- Plus, mortgage lenders are experimenting with new ways to check creditworthiness and streamline the application process.
Leo Loomie, Senior VP of Client Development at Digital Risk, a mortgage solutions provider, says:
“The climate is favorable to millennials entering the housing market. There are more tailwinds than headwinds going into 2019..While the entrance of millennials into the housing market was delayed by student loans, limited savings and mobile lifestyles, they now may be able to get mortgages this year..”
Nevertheless, here are some things holding back millennials from buying homes:
1. Uncertain jobs
Steven Gottlieb of Warburg Realty in New York City, says:
“They often are paying off other loans, making it tougher to save the cash required for a down payment.” However, he adds that money isn’t what seems to hold back many of the young adults he encounters in New York. Instead, they are hesitant to commit to a long-term living arrangement. “Millennials change jobs more often than previous generations, and thus are less likely to want to be tied down to a neighborhood or even a particular city.”
2. Family Planning on Hold
“Homebuying is often linked to life events like getting married or having a baby, both of which are happening later in life, and many people are choosing not to take these steps at all.”
The correlation is correct – the percentage of married millennials is close to the number of young adults buying homes. The Urban Institute reports 37 percent of 25- to 34-year-olds were homeowners in 2015, and at the same time, the Pew Research Center reports an identical percentage of millennials were married in 2017.
3. Misconception on the Downpayment
Kathy Cummings, Senior VP of Homeownership Solutions and Affordable Housing Programs at Bank of America, says:
“Millennials have misconceptions about homebuying that can keep them out of the market. For instance, nearly half of 2,000 adults surveyed by Bank of America in 2018 believed a 20 percent down payment is necessary to buy a house. Instead, many properties can be purchased with only 3 percent down. It’s an unfortunate misconception..”
4. Credit Scores
The results of the 685 millennials responding to the 2018 TD Bank Buy or Rent Survey reports that 17 percent said they didn’t think they would be approved because of their credit.
The Changes this Year:
The launch of the UltraFICO Score later this year could be a game-changer for millennials with low credit scores due to limited credit history, Loomie says.
The credit scoring model will allow mortgage applicants who don’t initially qualify for a loan to opt into having bank account data used to further gauge their creditworthiness. UltraFICO offers a revised score based on factors such as average account balance and automatic deposits from payroll or other sources. According to FICO, 70 percent of those with at least $400 in the bank and no negative balances in the past three months should see their score improve.
“It’s a very interesting way to assess someone’s financial responsibility. Since the program is only in the pilot phase, it remains to be seen how much of an impact it will have on millennial homebuyers. However, UltraFICO could potentially bump up credit scores by 20 points.”
Housing in Other Cities Have Attracted Many Young Buyers
“The key challenge recently is affordability. Six years of rapid home price increases and higher interest rates over the past two years have made it more challenging for all types of homebuyers…”
As a result, Cummings adds:
“We’ve seen a lot of millennial homeownership in markets like Detroit, Minneapolis and Charlotte, North Carolina..However, young homebuyers are priced out of many properties in urban areas such as San Francisco and New York City.”
Rising Interest Rates Isn’t an Obstacle According to History
While interest rates have already raised earlier this year, and is expected to raise twice more in a few months, high interest may not be a significant obstacle when taken in context of historical rates. “In the ’80s, mortgage rates were 18 to 20 percent,” Loomie explains.
Ultimately, the question of whether millennials will embrace homeownership in 2019 may boil down to whether young Americans are ready to settle down and pour their money into a single asset.
“Many millennials I work with in New York City would rather rent, thus keeping more capital freed up for other investments,” Gottlieb says. Plus, they aren’t convinced they will want to live in one place for five years, let alone 30 years. “The world is smaller for them, and moving to another city for a new job is not as daunting as it was for previous generations,” Gottlieb explains.
With this year’s low down payment options, more affordable housing in many cities, and alternative credit scores, homeownership will likely be within the grasp of many millennials this year. Although only time will tell if they will relinquish their freedom to grab hold of the opportunity.