Reluctant millennials could take advantage of lower mortgage rates to jumpstart the tepid housing market.
Millennials could be the serious boost the housing market needs to fully recover, but the selfie generation – those born in 1981 and later – faces some serious obstacles, from looming student debt to a tight credit market.
Further, buying a home in the U.S. is no longer seen as the surefire payoff it was before the Great Recession.
“People are changing preferences. We can’t say ‘millennials don’t want mortgages and that’s a bad thing.’ They don’t feel like they want to be stuck in one place, they don’t want the burden of a property,” says Andrew Jennings, a senior vice president and chief analytics officer at FICO. “There are a lot of misconceptions about property being the best investment you could possibly make. The reason you buy a house ultimately is to live in it.”
Deterred in part by dour post-crisis job prospects, young adults still aren’t purchasing property at a rate that could provide lift off to housing market growth, which policymakers have called “disappointing” recently. Tighter lending standards mean it’s undoubtedly become much more difficult for first-time homebuyers to secure a loan. The impact is perhaps most evident in young adults, whose rates of homebuying have reached historic lows this year.
According to a recent post by the New York Federal Reserve, the top reason renters gave for not buying a home was that they didn’t have enough money saved, or that they had too much debt. High levels of debt correlate with lower credit scores, which weigh on a potential buyer’s ability to qualify for a home loan, Jennings said during a housing conference sponsored by the Bipartisan Policy Center in Washington Tuesday.
“If we look at people in the 600 to 700 [credit score] range, those people on average have $25,000 in nonmortgage debt. It’s credit cards, student loans,” Jennings said, citing a survey FICO conducted with the Professional Risk Managers' International Association in July. “While the FICO score is not an indicator of income, we can probably rightly assume that those are not the wealthy people of the United States. So there’s already stress and strain on their income.”
But it might be just the most indebted graduates whose loan repayments are an impediment. An August Goldman Sachs report shows moderate amounts of student debt don’t restrain would-be buyers; it’s rather those who owe at least $50,000 or pay 5 percent or more of their monthly income toward loan payments who have a hard time buying. With a population of 82 million, millennials are the biggest age group and “as they move into a life cycle stage when housing consumption increases sharply, their housing demand could be influential to the U.S. housing outlook,” the authors wrote.
Instead, it’s the decline in real wages for those without a college degree that worries the two Goldman Sachs economists.
The problem comes full circle, though, as more young people recognize the benefits of a college degree and take on tuition costs they can’t afford.
“The country has to find a better way of educating. It’s not just a problem for housing, it’s a problem for the entire country if it costs $30,000 a year to go to a decent college,” Jennings said. “People end up taking on huge amounts of debt because the college system here doesn’t work very well. When it comes time to borrow for mortgages, we all sit around and say student debt is a problem.”
For example, Jennings said, 3 in 10 people who have a student loan end up defaulting on some form of other financial obligation, making lenders hesitant.
Furthermore, as millennials delay homeownership, they may be missing out on its financial and economic benefits, such as building more equity with more years of homeownership.
Young adults could benefit from taking advantage of lower mortgage rates now that could later increase and result in costly overall payments, said Janneke Ratcliffe, executive director for the UNC Center for Community Capital at the University of North Carolina-Chapel Hill. For instance, the difference between a 4 percent mortgage loan today and a 6.5 percent one in the future could result in a difference of thousands of dollars in payments over time.
“These are some of the things because of delay and our willingness to be comfortable with this idea of delay that I think we’re giving up over the long term. I think it has real long-term negative implications if we can’t do something about this problem,” she said.
One implication could be the lower rate at which millennials are forming their own households.
The share of young adults living with their parents has dropped in 2014, but the rate at which they form and head households themselves hasn’t risen, according to a Trulia report released Tuesday analyzing recent Census Bureau data. The findings suggest that those young people moved in with siblings or other relatives instead, and that the group’s true homeownership rate has fallen to a new low of 13.2 percent.
But today there are 13.3 million households headed by millennials, a figure that could grow to 21.6 million by 2018, according to another report released Tuesday from the Demand Institute, a nonprofit analyzing global consumer demand and operated by The Conference Board and Nielson. Millennials will spend more than $2 trillion on rent and home purchases combined, which is more per-household basis than any other generation, over the next five years.
Furthermore, according to the study, about 60 percent of millennials say they plan to own someday, and almost three-quarters of the group say they think ownership is an important long-term goal. Along with an improved labor market and a more secure financial footing down the line, these positive outlooks on housing could bode well for the market.
One way to ease some households into ownership is to ease access to credit. Jennings noted that changes to the FICO score would make it easier for young adults with a thin credit history to qualify for a home loan. For example, on-time utility bill payments and other obligations not reported to the Credit Bureau would work on their favor.
“The tightness of credit doesn’t have to be this way. We can certainly make credit more widely available certainly for young households, minority households and low to moderate income households without sacrificing any of the safety and caution that we need to have,” UNC’s Ratcliffe says.
But studies show the coming-of-age generation’s desire to eventually buy remains strong. And while their potential entrance into the housing market offers promise, economists aren’t sure what the long-term impact of their reluctance will be on the housing market.
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