Tag Archives: Millennial Home Buyer

“This Isn’t Fake, This Is Real”: Millennials Resort To Cyber Begging To Finance Down Payment

We imagine there are millions of American millennials who have made it through college, found a job, got married and would like to take their next crucial step on the way to adulthood: Buying a home. There’s only one problem: Thanks to stagnant wages and onerous student loan debt (factors that have helped jack up spending even as incomes have languished) most millennials don’t have any money.

Indeed, for the first time ever, millennials with student debt now have a negative net worth.

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While most Americans borrow when buying their homes, millennials can’t even afford the down payment that lenders typically require so that their customers have some “skin in the game.”

Yet, while most lenders view this fact as a risk (borrowers typically need to put up 20% of the price), a growing number of enterprising lenders see these broke borrowers as an opportunity. The latest example of this ill-advised trend was highlighted by the Wall Street Journal on Friday, with the absurdity inadvertently laid bare by WSJ’s social media team.

As WSJ explains, enabling millennials to buy homes they can’t afford risks igniting a re-run of the housing crisis – an outcome made more likely by the fact that home prices have already surpassed their excesses from the pre-crisis era. The phenomenon has been exacerbated by a shortage of homes that has persisted for years.

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But what’s even more alarming than the fact that lenders are out there chasing this business (despite the fact that nearly 40% of renters ages 25 to 34 said they save nothing every month for a down payment) are the schemes that some lenders have devised to help their borrowers “fund” their down payments.

To wit, CMG Financial created HomeFundMe, a service it launched last year. As its name would imply, HomeFundMe helps would-be borrowers beg for cash from their friends and family by sending passive aggressive emails.

Reese and Kyle Rademacher weren’t sure how they would afford a down payment to buy a home until their real-estate agent mentioned an offbeat idea: crowdfund the money from friends and family.

Mrs. Rademacher, a 28-year-old construction technician, set up an online profile with a program called HomeFundMe to solicit donations. Her parents and a few others responded, and in March the Rademachers closed on a $320,000 home in Cheyenne, Wyo.

HomeFundMe, a service launched by lender CMG Financial last year, is among a growing suite of services that help borrowers cobble together the funds to buy homes. These companies — startups and established players in the housing market alike — say they’re offering options for borrowers who have good credit and income but are struggling to save.

About 400 borrowers have used HomeFundMe to help buy homes since the program launched in October. On average, they raise about $2,500, though CMG also can kick in matching grants, and most borrowers have some of their own money saved as well, said chief marketing officer Paul Akinmade. Friends and family can also make their gifts conditional, meaning borrowers won’t get the money unless they actually purchase the home.

Mrs. Rademacher said she felt uncomfortable at first asking for help through HomeFundMe. But the Rademachers’ budget was tight after paying for their wedding, and a credit union had already denied their mortgage application because they didn’t have enough in savings.

“Whenever I emailed people the link, I would explain, ‘This isn’t fake, this is real,'”Mrs. Rademacher said. Now, some of her friends are interested in following suit. “It just worked out so well,” she said, “that people were like, ‘No way, I want that!”

One startup lender called Loftium will supply $50,000 for a down payment, on the condition that the home buyer agrees to rent out a room a Airbnb.

Erik and Rafaela de los Reyes considered applying for an FHA loan to buy a home in Seattle but were put off by the mortgage insurance and other costs. They instead got $28,000 from Loftium, the startup that offers funding in exchange for a cut of their Airbnb income. The couple have pledged to rent out their mother-in-law suite for three years.

“If you don’t have the down payment, it’s a great way to start,” said Mrs. de los Reyes, a 29-year old flight attendant. She and Mr. de los Reyes had never been Airbnb hosts before, so they were apprehensive. But as for their guests, Mrs. de los Reyes said, “we barely see them.”

Yifan Zhang got the idea for Loftium after renting out a spare room in her Seattle home. One of her goals, she said, is to even the playing field between millennials whose parents can help them buy their first home and those who are trying to save on their own.

“If you’re willing to kind of sacrifice and generate this extra income, then you should be able to have this leg up in homeownership,” said Ms. Zhang, the company’s CEO and co-founder.

Perhaps these lenders have forgotten the most enduring lesson from the financial crisis: When borrowers don’t have “skin in the game” – ie they’re playing with “other people’s money” – they’re much more likely to walk away when home prices fall.

Economists caution that actions such as loosening credit standards or supplying borrowers with more down payment money worsen the problem by creating more demand in a supply-constrained market, leading to a further overheating of home prices. And if home prices later fall, borrowers with little of their own money invested are more likely to simply walk away, they say.

These aren’t the only options for young people. And as we’ve previously pointed out, Freddie Mac recently revised its “3% down” mortgage program to eliminate pesky income restrictions and geographic restrictions allowing a new wave of “income-challenged” Americans to rush into already-hot housing markets. The Federal Housing Administration has a similar 3%-down program.

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Then again, while some people are turned off entirely by the GoFundMe concept, the idea isn’t so hard to rationalize: Why shouldn’t boomers pitch in to help millennials make their down payments? After all, they’re the ones who wrecked the economy and the housing market, right?

Source: ZeroHedge

Will Millennials Ever Become A Generation Of Homeowners?

BofA Has A Troubling Answer

America’s biggest as of 2016 generation, the Millennials, has a heavy burden on its collective 150 million shoulders: its task is to not only step in as a buyer of stocks once the baby boomers begin selling in bulk, but to also provide the much needed support pillar for the recovery of the US housing market. In fact, there have been countless “bullish” housing market theories built upon the premise that sooner or later tens of millions of young American adults will emerge from their parents’ basements, start a household, and buy a house.

So far that theory has not been validated. One simple reason is that Millennials simply can’t afford to buy a house. As we reported last week, a study from Apartment List showed that nearly 70% of young American adults, those aged 18 to 34 years old, said they have saved less than $1,000 for a down payment. This is similar to what a recent GoBanking Survey found last year, according to which 72% of “young millennials”- those between 18 and 24 years old – had $1,000 in their savings accounts and 31% have $0; a sliver (8%) have over $10,000 saved. Of the “older millennials”, those between 25 and 34, 67% had less than $1,000 in their savings accounts, 33% have nothing at all, and 15% had over $10,000.

So does that mean that Millennials can simply be written off as a potential generation of homeowners, and if so, what are the implications for the broader housing market?

That’s the question BofA economist Michelle Meyer asked on Friday, although she phrased it in the proper context: “Is it [still] cool to buy a home.

To our surprise, Meyer found that while the home ownership rate among young adults has plunged to a record low, helping to explain the slow recovery in single family home building, and confirming empirical observations that Millennials have largely been a ‘renter’ generation, by Bank of America’s calculations, the Millennial generation can afford to buy a home – at least in terms of making the monthly payments. While we – and many others would dispute that – BofA does make some other interesting observations, namely that lifestyle changes, including delayed marriage and child rearing, have led to fewer homeowners and a tendency to live close to city centers. Well, if it’s not money it’s clearly something else. Let’s dig in.

First, here is BofA on a rather trivial, if critical topic: “the importance of the youth”

In order to understand the future of the housing stock, it helps to get a grasp on the growth in population, which is a function of immigration and the rate of births/deaths. The Census Bureau is projecting population growth of 0.8% annually over the next decade and 0.7%, on average, through 2036, showing continued slowing from the 0.9% average last decade. Perhaps even more important, however, is the age composition, with a particular focus on young adults who are the drivers of household formation. There are currently 75 million individuals considered to be Millennials, making up the largest generation. The average age is 27.5, implying that there is a large cohort of young adults coming to age (Chart 1). In theory, this should underpin growth in home ownership. But, it is complicated – we have to understand the ability of Millennials to afford housing and the desire to become homeowners vs. renters.

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Can they afford to buy?

The first question to ask is whether the younger generation can afford to buy a home. We turn to the National Association of Realtors (NAR) affordability index which is a ratio between median family income and the qualifying income for a mortgage as a function of median existing single-family home prices and mortgage rates. According to this measure, homeownership is still very affordable relative to history. What about for young adults? Following the NAR’s methodology, we compute an affordability measure for the 25-34 year old age cohort using median household income data from the Census Bureau. Our computed index only goes to 2015 given data limitations, but we extrapolate forward (Chart 2). We find that housing is still affordable for young adults, although not to the extent it is for the overall population. The gap in affordability between the overall population and young adults has widened over the years. That said, the affordability index for young adults is still above the historical average for the aggregate, implying that housing is generally affordable.

So what seems to be the problem? One obstacle is being able to make the downpayment. The NAR measure assumes a 20% down payment, which is a high hurdle for young adults– remember that the bulk of the current 25-34 year old cohort started their careers during the financial crisis and early stages of the recovery, when the economy and labor market were fragile. Plugging in a lower down payment of 10% and the situation looks worse due to increased principal and interest payments. With a 10% downpayment, the index would be at 125.2 in 2015, which is 11% lower than the standard 25-34 year old index and 25% lower than the broad NAR index.

Another challenge is the ability to take on a mortgage loan given high student debt. According to the NY Fed’s credit panel, total outstanding student debt has reached $1.3 trillion, a substantial increase from the $260bn level in 2004. According to the NAR’s Generational Report, nearly 50% of homebuyers under the age of 36 noted that student debt delayed their home purchase, making it harder to afford the downpayment. And, of course, there is the challenge from tighter credit standards which has made it more difficult to achieve homeownership.

But do they want to buy?

Addressing whether Millennials can afford to buy is only one part of the story. We need to understand if they actually want to buy. The homeownership rate has tumbled at a faster rate for 25-34 year olds than for other generations which we do not think can be explained by affordability metrics (Chart 3). We think it also owes to lifestyle changes. Maybe there is something to the stories about Millennials preferring to spend money on avocado toast instead of their home?

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The shopping cart of young adults

Using data from the Consumer Expenditure Survey, we can look at the evolution of the consumer basket over time for those aged 24-35 (Table 1). Relative to the peak of the housing bubble in 2004, there has been a decline in the share of dollars spent on owned shelter and an increase in spending on renting. It also seems that this age group is spending more on healthcare and household operations, which include services paid to keep their household running efficiently (think cleaning). This has come at the expense of spending on apparel, transportation and groceries. The young adult in 2004 has a difference shopping cart than one today.

The single life

The change in spending patterns could reflect the fact that young adults are not only less likely to be homeowners, but they are less likely to be married or even live independently. Instead, this age group is living with parents or other relatives more than in the past (Chart 4). This adjustment in living arrangements has been ongoing for years but the Great Recession seemed to have speed up the trend. Today only 55% of those aged 25-34 live with a spouse/partner compared to over 80% in 1967. Life events such as getting married or having children are typical triggers to buying a home. The longer this age group lives with parents or independently, the more home ownership will be delayed.

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City slickers

We have also seen a shift toward urban centers and away from rural areas over the years. This goes hand-in-hand with a decline in home ownership for young adults. Interestingly the share of young adults living in the suburbs has been fairly steady at around 41% (Chart 5). Moreover, it appears that there is a flocking toward the major cities, specifically in the city centers which are close to transit, workplaces and restaurants. City centers typically have more rental properties than the suburbs. But we also see greater home sales close to city centers than in the past. According to BuildZoom, new home sales within 5 miles of the centers of the 10 most densely cities have exceeded 2000 levels but if you go another 10 miles out, sales are about 50% below 2000 levels.

There are both cyclical and secular forces behind the drop in the home ownership rate for young adults. While young adults can generally afford housing, there are other constraints including the ability to make a large enough down payment and tighter credit standards. Lifestyle changes are partly to blame.

BofA’ troubling conclusion: “These dynamics won’t change in the medium-term which should translate to a lower equilibrium pace for single family housing starts.”

Source: ZeroHedge