A previous post, “Millennials Face Unprecedented Economic Hurdles to Home Ownership,” outlined some of the most pertinent economic constraints facing the Millennial generation with regards to home purchase. Declining incomes, higher costs of living and an increasing cost of homes present significant obstacles to young adults’ ability to buy a home. Another obstacle for would-be buyers is a shortage of available, lower-cost houses.
Currently there is mismatch of available product and lower-cost product that most Millennial households could afford. Housing inventory has remained depressed even as prices have risen in recent years, and inventory is in shortest supply in the most affordable segments. The divergence in home prices and inventory is a perplexing trend, as prices have been the most robust predictor of housing inventory throughout history.
Furthermore, appreciation in home prices hasn’t been symmetric across the nation or even across metros. It has been steeper – as one would expect – where job growth has been strongest. According to a study by City Observatory, job growth since the recession has been much stronger in the inner cities and central business districts compared to the suburbs. Millennials chasing jobs in the city are going to have very limited options in the price range they can afford if they plan to live within close range of the workplace. Commuting costs, as well as the opportunity costs imposed by a long commute, are both sacrifices that savvy Millennials take into account when making housing decisions.
Additionally, credit is still significantly tighter than it was prior to the recession or even 2001. Federal Housing Administration advertises that it only requires a down payment of 3.5% for those with minimum FICO score of 580, and Fannie Mae and Freddie Mac announced they will accept down payments of just 3.0% for applicants with a minimum FICO score of 620 and 660, respectively. However, lenders are applying tighter credit standards within these boxes. The median credit score for mortgage originations has risen substantially from 701 in 2001 to 743 in 2014, according to Urban Institute. The most significant causes of these overlays are uncertainty among lenders about servicing or underwriting rules imposed by FHA or GSEs. Violations would result in the abdication of the credit risk back to lenders. That comes with increased litigation costs and higher costs for servicing delinquent loans. Credit overlays hinder Gen Y disproportionately because they are less likely to have saved for a large down payment or build their credit up as high while getting themselves established, deeming them to be higher risk.
The economic barriers for Generation Y are real, and they are a significant hindrance for the generation’s ability to buy homes. However, it shouldn’t be forgotten that there are other factors other than changes in the economy, lending markets and housing markets that have and will undoubtedly continue to play a role in Gen Y’s housing decisions going forward. We will address the demographic and social factors affecting trends in homeownership in our next blog post.
Credit: The Good Guys at PMI & MPF