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Millennials still eager to get into the housing market

December 6, 2018

The housing market has changed a lot in the past several years, as rates rose and the economy improved. The fact is that after a long period in which refinances dominated the mortgage sector in particular, the power dynamic has shifted in favor of purchase underwriting once again. That trend has largely been driven by the millennial generation coming of age and finding a greater buying power after a slow start in the wake of the recession.

"Millennials are making good on intentions to buy a home."

Industry polls long showed that this generation of young adults highly valued homeownership as a future goal even if they didn't think it was something they were going to be able to achieve anytime soon. Now, after years of economic improvement and slow but steady wage growth, it seems that millennials are making good on those intentions, as they aren't shying away from the housing market even though both rates and prices are sharply on the rise these days, according to the latest Millennial Tracker from Ellie Mae. This came as the average age of millennial buyers increased to 29.7 years old, up from 29.3 years in October 2017, but with no change from September.

In October, there was a 1.7 percent increase on an annual basis in the size of the average mortgage sought by millennials, with loan values rising to slightly less than $189,700, Ellie Mae's data showed. However, that number was also down slightly from the roughly $192,000 seen in September, perhaps indicating that the seasonal slowdowns traditionally seen in the market are still happening, and despite the fact that home prices rose on both monthly and annual bases.

"Although housing prices and interest rates are still rising at a faster pace in 2018 than they have in previous years, those trends are not yet stopping millennials from purchasing homes and putting down roots," said Joe Tyrell, executive vice president of corporate strategy for Ellie Mae. "It is important for lenders to educate millennials on the value of FHA loans that bring lower down payments and can allow these new homebuyers to stretch their dollar a little further even with rising interest rates."

Why the low values?
It's notable that the average mortgage sought by millennials these days remains well below $200,000 in value, and therefore even farther below the median U.S. home price. That may be due, in part, to the fact that they have a little less buying power than previous generations at the same age, and also that they're potentially more active when it comes to looking for bargains, according to a new study from Chase Home Lending and Pinterest, titled "Pins & Properties: Chasing Your Dream Home."

Chase found that these young adults in 2018 made up the single largest demographic of homebuyers for the second year in a row, and nearly all of them bought homes with the intention of renovating some aspect of them within three years of purchase. Nearly 9 in 10 millennial homebuyers bought an existing home, rather than new construction, and often used Pinterest for inspiration on low-cost renovation projects - traffic for such searches on the social network site increased 300 percent on an annual basis this year.

Buying a fixer-upper can be beneficial for young adults in particular for a number of reasons, according to remodeling expert Drew Scott. First and foremost, it helps young shoppers stay on budget and not overspend on a home purchase, but also immediately increases the value of the home, potentially boosting their equity significantly over time while simultaneously making the space a little more livable.

"Young adults often have to put in more savings efforts before being able to get into the market."

Some still waiting
In many parts of the country, however, homes in the lowest third of property values just aren't being put up for sale at the same rate as more expensive properties, potentially locking millennials out of being able to make an affordable purchase in many regions. That's certainly the case in Florida, where young adults often have to put in a few extra months - or even years - of savings before being able to get into the market, according to the Tampa Bay Times. Problematically, however, home prices continue to rise at rates well above wage increases, and are likely to continue doing so for some time to come, meaning that young adults may find themselves struggling to keep up.

As a result, many millennials - among other would-be buyers - are waiting for the market to simply cool down from its overheated levels in the Sunshine State before pulling the trigger on a purchase, the report said. But the fact that this is happening more or less en masse is starting to have an impact, shifting some parts of Florida from being fairly seller-friendly to being a little more even overall in terms of the benefits for buyers.

At the same time, many would-be buyers say they don't want to get into a situation where they make a purchase and start to see their property values dip once again within a few years, the report said.

"We were very reluctant," Frank Liscio III, a 33-year-old homebuyer in Tampa Heights who likewise waited for some time before closing a deal, told the newspaper. "Everybody is thinking, 'Okay, let's wait for things to go back down, because we don't want to buy too high and then the house puts us under.'"

Likewise, many millennials seem to prefer making a home purchase in bigger cities, rather than suburbs as previous generations might have, according to the National Association of Realtors. With city living comes higher prices for rent, which makes it even harder to save up for a sizable down payment on an expensive property in or near urban centers.

To that end, many residential suburban communities are now making a greater pitch to young adults as a means of luring them in, with promises of allowing them to a live a metropolitan lifestyle even if they're located dozens of miles from the city center, all at a lower price, the report said. Often, that might include hosting more "urban-style" events, trying to lure "hip" businesses (independently owned or parts of well-known, trendy chains) and otherwise trying to foster more of a sense of an active community.

A huge part of the business
The reason why millennials are so much of the focus for communities large and small is that their buying power as a collective group is only expected to keep rising in the years ahead, according to projections from the NAR. While conditions will continue to be difficult for first-time buyers in 2019 - thanks to higher rates and prices, and relatively few owners of lower-value homes putting their properties up for sale - they are still expected to make up 45 percent of all mortgage originations next year. That compares quite favorably with the 37 percent for people in Generation X, and 17 percent from baby boomers.

"70% of millennial homeowners have relatively small properties."

Ali Wolf, director of economic research at Meyers Research, told the NAR that millennials are "more price-conscious than any other generation" and that 70 percent of those who already own homes have relatively small properties, measuring fewer than 2,000 square feet, the report said. Nonetheless, millennial homebuying activity is expected to keep growing in 2019 and could finally reach their peak in 2020 - after years of growth.

The bigger picture
This all comes at a time when mortgage originations overall aren't being deterred by declining affordability, according to the latest Weekly Mortgage Applications Survey from the Mortgage Bankers Association. In the week ending Nov. 23, which included the Thanksgiving holiday, mortgage applications surged 5.5 percent on a seasonally adjusted basis, driven as usual by more purchase activity on both weekly and annual bases.

Interestingly, though, refinances rose as well, ticking up 1 percent on an adjusted weekly basis, the report said. In all, though, because of the 9 percent weekly jump in purchase activity, the share of the market taken up by refinances continued to slide, dropping to 37.9 percent of all applications from the previous week's 38.5 percent.

"After several weeks of market volatility, 30-year fixed mortgage rates decreased four basis points to 5.12 percent last week," said Mike Fratantoni, the MBA's chief economist. "Homebuyers responded, with purchase applications 1.7 percent higher than a year ago, and after adjusting for the Thanksgiving holiday, they increased almost 9 percent from the previous week. The rise in purchase activity was led by conventional purchase applications, which surged almost 12 percent, while government purchases were essentially unchanged over the week. This also pushed the average loan size for purchase applications higher, which likely meant there were fewer first-time homebuyers in the market last week."

With all these considerations in mind, young adults would be wise to do all they can to boost their buying power - both through more savings efforts and endeavoring to improve their credit scores - so that they can lock in a deal as soon as possible. With prices and rates alike expected to keep rising throughout 2019 and potentially beyond, the sooner they act, the more likely millennials (and everyone else) will be to lock in a deal that helps them save significantly over the life of a loan.




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