Did you know that one in four Americans 35 years old or younger believe they need to have a perfect credit score to be considered for a mortgage? With the FICO credit score model that ranges from a low of 300 to a high of 850, however, one needs only to be mid-range in most cases, depending on the lender and type of loan they seek. This is among the many myths millennials maintain, however, and it’s up to the lending and real estate community to change their perceptions, according to an article by Vincent Salandro in BuilderOnline.
“More than the generations before them, today’s young consumers struggle to achieve the American dream of homeownership,” says Salandro. “Escalating home prices, stagnant wages, and modestly increasing mortgage rates are contributing to a decline in housing affordability that is expected to continue this year.” He adds that the National Association of Realtor’s Housing Affordability Index, which measures whether a median-income family earns enough to qualify for a loan on a median-priced home, has fallen over 20 points to 144.0 in the past three years. Lower index readings indicate worse affordability. Salandro maintains that many first-time buyers avoid looking for a new home because they are confused or overwhelmed by the process, especially when it comes to down payments and financing. He cites recent studies that show that these crucial elements of the home-buying equation are laden with misconceptions and outright myths, starting with the amount of the down payment requirements. “According to the Urban Institute, nearly 65% of renters 40 years old or younger believe they need to put down 15% in order to buy a home, even though the national median down payment for first-time buyers is 5% to 7%,” he says.
It’s easy to see how this confusion is impacting the number of homes sold in the U.S. keeping millions of would-be buyers out of open houses and model homes. “As many as 19 million Americans aged 40 or younger have credit profiles and income that are strong enough to qualify for a mortgage but choose to rent instead, according to the Urban Institute,” says Salandro.
Many real estate companies and builders have managed to help educate potential first-time buyers by placing mortgage calculators on their websites. And Realtors and builders alike are wise to offer free education sessions about homeownership and work closely with lenders to aid first-time homeowners through the search process. While millennial buyers appreciate the information that can help smooth their financing decisions, however, Salandro warns that too much emphasis on education can also serve the unintended purpose of hand-holding the buyer. Caution must be observed, avoiding being overly simplistic, assuming buyers are clueless about mortgage financing.
Salandro speaks of another issue facing first-timers that stymy their dreams of homeownership. “While many young Americans have false notions about what it takes to buy a home, one distressing fact about this demographic can’t be denied: Many of them haven’t saved a penny toward a new home.” Salandro goes on to quote Apartment List, which cites almost half of millennial renters have no down payment savings, and only 11% have saved $10,000 or more. “The share of median income needed for a 20% down payment on a median-priced home was 23.3%, compared with 18% just six years ago, according to the Urban Institute,” says Salandro.
Today’s first-time buyers are more than twice as likely to receive help from family and friends than repeat buyers, and among first-time buyers, gifts accounted for nearly one-quarter of total down payment costs, according to experts. In addition, many millennials have prioritized education while delaying marrying and having children, key triggers associated with home buying.
National Association of Homebuilders (NAHB) chief economist Robert Dietz has some good news, however. He says new-construction starts are on the upswing for many first-time home buyers, suggesting there are areas for growth with the first-time buyer market share. He also reports townhouse construction has increased 24% in the past four quarters compared with the previous four, which could offer more opportunities for first-time buyers to purchase a new home.
“Despite declining affordability in many markets and down payment misconceptions, the national homeownership rate for those younger than 35 years old reached 38.6% in the third quarter of 2018, the highest level since 2013,” says Salandro.
Source: BuilderOnline, NAHB, NAR, TBWS