Only 32 percent of millennials owned a home in 2015, according to a 2018 Millennial Homeownership Report from the Urban Institute. However, that might change in 2019.
While interest rates are rising, housing prices are expected to stabilize, offering additional affordable options to first-time homebuyers. Plus, mortgage lenders are experimenting with new ways to check creditworthiness and streamline the application process.
When it comes to whether the climate is favorable to millennials entering the housing market, Leo Loomie, senior vice president of client development for mortgage solutions provider Digital Risk, suggests “there are more tailwinds than headwinds going into 2019.”
However, millennials still like the flexibility of renting, so the reality of a wave of millennial homebuyers in the coming year is no sure thing. While millennials may be able to get mortgages in the coming year, the appeal of being able to move at will may win out over the prospect of homeownership.
Why millennials wait to buy homes. The entrance of millennials into the housing market has been delayed by a number of factors, including student loans, limited savings, and mobile lifestyles.
“They often are paying off other loans, making it tougher to save the cash required for a down payment,” says Steven Gottlieb of Warburg Realty in New York City. However, he adds that money isn’t what seems to hold back many of the young adults he encounters in New York. Instead, they are hesitant to commit to a long-term living arrangement. “Millennials change jobs more often than previous generations, and thus are less likely to want to be tied down to a neighborhood or even a particular city.”
What’s more, delayed homeownership may be a natural consequence of millennials holding off on other rites of passage. “Homebuying is often linked to life events like getting married or having a baby, both of which are happening later in life, and many people are choosing not to take these steps at all,” says Tendayi Kapfidze, chief economist at online loan marketplace LendingTree.
In fact, the percentage of married millennials tracks closely to the number of young adults buying homes. The Urban Institute found 37 percent of 25- to 34-year-olds were homeowners in 2015, and the Pew Research Center found an identical percentage of millennials were married in 2017.
Credit scores are another factor that can discourage millennials from buying a home. Of the 685 millennials responding to the 2018 TD Bank Buy or Rent Survey, 17 percent said they didn’t think they would be approved because of their credit.
The average credit score for millennial homebuyers in the nation’s 50 largest metro areas is 656, according to a 2018 analysis by LendingTree. Cummings says most institutions use 680 as the cutoff for what they consider good credit, although applicants with credit scores as low as 580 may be eligible for mortgages.
However, the launch of the UltraFICO Score later this year could be a game-changer for millennials with low scores because of limited credit history, Loomie says. The credit scoring model will allow mortgage applicants who don’t initially qualify for a loan to opt into having bank account data used to further gauge their creditworthiness. UltraFICO offers a revised score based on factors such as average account balance and automatic deposits from payroll or other sources. According to FICO, 70 percent of those with at least $400 in the bank and no negative balances in the past three months should see their score improve.
“It’s a very interesting way to assess someone’s financial responsibility,” Loomie says. Since the program is only in the pilot phase, it remains to be seen how much of an impact it will have on millennial homebuyers. However, Loomie says UltraFICO could potentially bump up credit scores by 20 points.
Changes in mortgage rates may cause homebuyers and sellers to hesitate about jumping into the market, while renters benefit from higher homeownership rates.
Young buyers need affordable housing. Even if millennials are able to qualify for a mortgage, they may have trouble finding a property within their budget. “The key challenge recently is affordability,” Kapfidze says. “Six years of rapid home price increases and higher interest rates over the past two years are making it more challenging for all types of homebuyers.”
As a result, access to housing may vary significantly throughout the country. “We’ve seen a lot of millennial homeownership in markets like Detroit, Minneapolis and Charlotte (North Carolina),” Cummings says. However, young homebuyers are priced out of many properties in urban areas such as San Francisco and New York City.
While interest rates are climbing, that may not be a significant obstacle when taken in the context of historical rates. “In the ’80s, mortgage rates were 18 to 20 percent,” Loomie explains.
Millennials still want flexibility. Ultimately, the question of whether millennials will embrace homeownership in 2019 may boil down to whether young Americans are ready to settle down and pour their money into a single asset.
“Many millennials I work within New York City would rather rent, thus keeping more capital freed up for other investments,” Gottlieb says. Plus, they aren’t convinced they will want to live in one place for five years, let alone 30 years. “The world is smaller for them, and moving to another city for a new job is not as daunting as (it was) for previous generations,” Gottlieb explains.
With low down payment options, more affordable housing and alternative credit scores, homeownership will likely be within the grasp of many millennials in 2019. But don’t count on them relinquishing their freedom to grab hold of it.