Waiting to Buy
According to a new study by the Urban Institute, millennials are waiting longer than previous generations to enter the housing market. Approximately 8% fewer millennials of ages 25-34 own homes as compared to baby boomers and generation Xers at the same point in their lives.
Why are millennials late to homeownership? The Urban Institute provided several reasons:
The study found three primary external factors keeping millennials from entering the market.
1. Lack of Supply – Affordable housing is rare in more popular urban areas that millennials prefer (and where jobs are located). Housing starts are at approximately 1.2 million – an improvement from the post-housing crisis 550,000 units in 2009, but still below levels from the 1960s. Low supply leads to high prices even for modest homes.
2. Tight Credit – In general, the credit scores of borrowers at loan initiation has been gradually increasing since 2000. The median credit score of mortgage loan borrowers increased from 695 in 2000 to 738 in April 2018. Among the lower 10% of borrower credit scores, the number rose from 595 to 648. Millennials have a 640 median credit score – well below the average of generation Xers (662) and baby boomers (728) – putting most millennials below the 10th percentile of overall borrower scores.
3. High Rent – According to the Urban Institute study, a 1% increase in rent-to-income ratio decreases the chance of home ownership by 0.07 percentage points – presumably because it's harder to save up for a down payment. In urban areas, this can easily translate to a double-digit drop in the likelihood of home ownership.
Would you believe that getting married increases the likelihood of home ownership by 18 percentage points? Millennials tend to delay marriages, as well as having children (a factor that increases homeownership likelihood by 6.2 percentage points).
That's a common-sense conclusion – if you're able to afford getting married and having children, you're also more likely to afford a home. In a similar common-sense conclusion, increased student loan debt, a significant issue for many millennials, decreases the odds of home ownership by 0.15 percentage points for every 1% increase in student debt.
Other factors include diversity, education level, and parental ownership (you're more likely to own a home if your parents owned one).
How the Housing Industry and Government Can Help
What can be done to help millennials overcome these factors? The Urban Institute Study gives four suggestions.
1. Improved Financial Understanding – Millennials cite lack of down-payment funds as a major hurdle to home ownership, but many don't realize that loans are available with less than the traditional 20% down payment.Misconceptions like these may scare millennials out of the market.
2. A Streamlined Mortgage Process – The mortgage process can be overwhelming to first-time millennial homebuyers. Technology-based lenders can improve risk assessment and make underwriting more accurate and efficient – and potentially lower racial/ethnic barriers.
3. Credit Scoring – Millennials often have thinner credit files – or no credit file at all – making it difficult for them to qualify for mortgage loans. Typical millennial expenses like rent, utility, and phone/cable bills are not typically reported to the credit bureaus. Incorporating these expense records into credit scores could help millennials show responsible behavior to lenders.
The industry could also take steps to more realistically assess millennial income (including side jobs and inconsistent part-time work) and debt (balancing the nature of the debt against income potential).
4. Land Use Changes – Developers rarely build affordable housing because they can't make money off it. Land prices, construction costs (including labor), and regulatory/zoning burdens drive developers toward higher-end housing with a greater return per unit. Government at all levels could help to tilt the balance back toward affordable housing.
While some of these changes are in progress, they may not arrive in time to help millennials accelerate the homeownership process. Millennials must overcome these issues on their own.
Millennials face great challenges in home ownership, as the Urban Institute clearly outlined. However, the challenges aren't insurmountable. They just require adequate planning and the willpower to stick to the plan.
You can't control external factors like high rents and a limited housing supply, so focus on the factors that you can control – starting with your budget. If home ownership is important to you, craft a budget that allows a surplus to build down payment money. That requires sacrifice. You may need to settle in the short term for lower-rent housing, dining out less, driving a less-expensive car, or other compromises in daily and monthly expenses.
Check your credit report for any errors or signs of fraud. If your credit score needs help, take actions to improve it – like paying down excessive balances and keeping your credit utilization to a minimum. This will help you save on interest costs and qualify for a better mortgage loan rate when you're ready to buy. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Meanwhile, set a housing target. Establish your "must-have" and "nice-to-have" lists. Check current housing prices in your neighborhood to see how your desired home/neighborhood stack up in price. Use online calculators to help determine what you can afford and where you can make compromises if necessary.
When housing supply is limited, it's important to scan the market constantly for bargains and keep your finances in order so you can take advantage of a bargain when you find it.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.