When one tries to Google the phrase "millennials and mortgages," something curious happens. Two different – and in some cases, mutually exclusive sounding – accounts of millennials and their home-buying habits, or lack thereof, emerge.
Millennials are either dragging down the housing market because they can't/won’t buy houses, or millennials are both leading the modern mortgage market and simultaneously leading it into the digital age.
It’s a lot of apparently contradictory data about a rising generation of consumers that is often discussed, but not nearly as often well-understood. The upshot is that millennials are buying houses – but not at the rates that consumers in the same age cohort have historically bought homes.
“Historically low mortgage rates and increasingly favorable employment conditions should have generated a far greater number of home purchases by young adults, especially in the last five years," said Sam Khater, chief economist at Freddie Mac.
And the fact that they haven’t has turned up a lot of data, revealing that the market for millennial real estate consumers remains an extremely uneven and, for many, rather uncertain place.
The Complex Demographic
Born between 1980 and 2000 (roughly), the millennial generation is a sharply age-bifurcated place, despite the common habit of talking about millennials as though they are a fairly homogeneous group when they really aren’t.
Younger millennials – those born between 1989 and the year 2000 – are still in their 20s, in some cases still in college and mostly new to the adult world of work and commerce. They aren't buying houses – but even historically speaking, college students and recent grads have never been an incredibly highly active share of the housing market.
Older millennials – born before 1988 – are in their 30s, have spent longer in their careers, and are more likely to have gotten married and started families. PYMNTS, in a study of that older subset of millennials – bridge millennials – found that their spending, saving and general interests are very distinct, both from their younger fellows in the millennial generation and the population at large. Those consumers are buying houses, and are a driving force in some markets. The conventional wisdom of a few years ago – that the millennial generation had evolved beyond homeownership – has not exactly been proven.
“Millennials are shaping the market more than anyone realized. In fact, half of all buyers are under 36 and half of sellers are under 41,” said Zillow Chief Marketing Officer Jeremy Wacksman, referring to results from a survey of more than 13,000 homeowners, sellers, buyers and renters that were part of the Zillow Group Report on Consumer Housing Trends.
But while millennials may be driving the real estate markets, data released by the Urban Institute’s Housing Finance Policy Center indicates that generationally speaking, they are participating in the homeownership markets less, with an ownership rate running 8 percent to 9 percent behind previous generations.
Why that is the case is broken down over dozens of factors, including income, race, education level, marital status, region, city and parental homeownership status, to name a handful of the most oft-cited data points. In general, the data agrees that when it comes to homeownership, the majority of millennial sellers are white, college-educated, earning a household income over $100,000 and have parents who own homes.
The data across sources also seems to agree that, despite programs like FHA that are designed to lower the initial costs of homeownership, the down payment is the stumbling block that keeps most millennial buyers away.
The Down Payment Dilemma
According to data released last month by Redfin, affording a down payment was the leading concern among millennials looking to purchase a home in the last 12 months, with 50 percent of millennial respondents noting down payment woes.
Redfin’s data echoes the Urban Institute’s in noting that down payment anxiety is not quite evenly experienced. While 24 percent of millennial respondents reported gift money from family as an expected source of funds for a down payment, that expectation grew to 40 percent among households with income north of $100,000.
Meanwhile, households earning less than $100,000 are more likely to report saving money out of their paycheck toward a mortgage, or taking on a secondary source of employment to raise the funds.
"For millennials who have launched their careers while working to pay off student loans in the last decade, having enough to set aside toward a down payment would have been a significant accomplishment," said Sheharyar Bokhari, senior economist at Redfin. "These results reveal some of the inequalities that have been exacerbated in the years following the recession, with the well-off having more flexibility and thereby ability to become homeowners and build more wealth, through advantages like financial support from family and the opportunity to invest in the stock market."
Some of those inequalities, reports have noted, can actually be aided by education, since many millennials hold a somewhat dated belief that a first-time homebuyer needs a full 20 percent to put down on a purchase. In fact, the median average down payment rate on first-time mortgages in the U.S. is 5 percent – and the FHA program allows first-time buyers to go as low as 3.5 percent. That means many millennials may be closer to affording homeownership than they think.
But, as the Urban Institute pointed out, millennial buyers are clustered around urban markets, yet another complicated factor.
“Millennials prefer living in high-cost cities, where housing supply is inelastic,” the study notes.
And inelasticity breeds expense. In high demand metro markets, where home prices can average at or about $500,000, saving up for a down payment – even a 3.5 percent down payment – could take a matter of years.
Zillow estimates that at today’s rates, it would take someone renting a home in the Seattle metro area nearly three years to save a 3.5 percent down payment on a home – assuming housing prices don’t rise at all during that time, which of course they will.
And this is where startups like HomeFundMe come into play.
New Methods of Access
Run by lender CMG Financial, HomeFundMe gives otherwise qualified (by credit score and income) homebuyers a way to crowdfund down payments and other associated costs from family members and friends. As part of a conventional financing agreement with a bank or mortgage lender, consumers can receive cash gifts toward a down payment, but the circle of eligible gift givers is very limited – and those gifts must be carefully (and sometimes arduously) verified.
HomeFundMe allows consumers to take crowdfunded gifts from a wider range of their friends and family network, and on average helps users raise about $2,500 toward their down payment costs. CMG also offers users some access to match funds with grants to further boost their down payment amount.
To use the HomeFundMe service, however, homebuyers must procure their mortgage loans from CMG Financial, which limits their ability to perhaps hunt down the best rate or fee structure. But for customers like Reese and Kyle Rademacher, who were turned away by a credit union because their savings weren't enough for a down payment and closing costs, the ability to use an outside-the-box solution like HomeFundMe was the difference between being able to afford to buy a home and not.
As Reese Rademacher told The Wall Street Journal, she initially felt uncomfortable asking friends and family for money, but through the funds and eventual loan that she and her spouse were able to secure, the couple was able to close on a $320,000 home in Cheyenne, Montana.
HomeFundMe is a solution in early days still – according to WSJ reports, about 400 borrowers have used the program to help buy homes since it launched in October. And this type of startup effort is not without controversy: Some economists worry that loosening credit standards to enable borrowers to bend down payment requirements runs the risk of further pushing prices up in markets that are already hot to boiling. Overheating of home prices is a recent concern – particularly if prices suddenly ebb or even level off. If nothing else, the experts noted, homeowners with their own funds in the down payment are unlikely to walk away in the event of a market downturn.
But the market for millennial homebuyers, though stronger than it looked even five years ago, is still lagging in many regards – and if potential millennial homebuyers are to be believed, the high cost of entry is acting as a significant barrier for many borrowers. If that gap between millennials and previous generations is going to close, it seems that something has to happen to make the first step into ownership a bit more accessible to a wider range of younger buyers.