The individuals born between 1980 and 1995 are considered Gen Y/Millennials. They are the largest generation (82 million), bigger than the Baby Boomer era (72 million). As many people know, Gen Y is saddled with tremendous student loan debt (over $1 trillion), live at home with their parents for longer periods of time than Gen X and Baby Boomers. They tend to marry later in life (30s) and they are very comfortable with technology.
In fact, Internet access and cell coverage figure into decisions being made on where they will live, where they will work and what and how they will purchase everything. Because they are so comfortable with technology, this has made them very adaptable. As reported in a recent issue of “Mortgage Professional America”, they can text with their eyes closed, multi-task all day long and somehow stay in touch with everyone they have ever met. Because this generation is so large, they will assume a larger share of the mortgage market in the coming years. According to a recent report by The Demand Institute, Millennials will spend $1.6 Trillion on home purchases in the next five years – more on a per-person basis than any other generation.
So if this generation is so large and willing to spend so much on housing, why have we not seen a boom in housing reflective of the 1970s when baby boomers were flooding the housing market? What are the obstacles that are holding this generation back from purchasing that first home?
Millennials have been accused of stalling the housing recovery because of their reluctance or inability to purchase a home. In fact, the 30-34 year old group has the lowest homeownership rate in decades. While there are some changes in the rental markets as pricing increases, there still appears to be a changing dynamic in the Millennials home-buying pattern.
Many are choosing to live in city centers rather than in more tradition suburbs. This location allows them to take mass transit to work and play putting them closer to their office and entertainment centers. More and more construction is occurring with mixed use properties and city center-like amenities in the same area. An example of this is a section of Bethesda, Maryland where a mall is being torn down and replaced with a large number of mixed use properties offering condominiums, restaurants and office space. The trend of buying older homes and restoring them with modern facilities for today’s young families also continues in many areas, especially where these homes are near mass transit.
However reacting to new housing trends and offering better amenities will not resolve all of the obstacles that face the millennial generation when it comes to buying homes. One of the largest obstacles these new borrowers will have to overcome is the huge student loan debt they are repaying, and it won’t just be what they are paying at the time of application. Fannie Mae has long required that all deferred installment debt, including student loans not yet in repayment, be included in the calculation of the borrower’s debt-to-income ratio, either by obtaining a notice of the future payment or including a payment of 2% of the outstanding balance.
However student debt is not the only obstacle that these individuals face when applying for a mortgage. While having a two year work history does not seem difficult to obtain, members of the Millennial Generation are more likely to move jobs frequently until they find their best fit and more likely to leave a job because it is not a fit for them. These gaps in employment have been viewed as instability of income and an issue when applying for a mortgage loan.
In addition to just qualifying for a mortgage, this generation has other obstacles to overcome. Rob Chrisman with The Stratmor Group writes that statistics tell us that that young adults today are more likely to be foreign born and speak a language other than English in the home. This shouldn’t be too surprising given the demographics of the states like California, Florida and Texas which have large populations of Latin Americans. Yet these issues can make the task of obtaining a mortgage appear almost insurmountable for many of these potential applicants.
There is also concern that this generation is being priced out of the market. The rise in home values disallows the affordability of home purchases in many real estate markets around the country. Many metro areas lure the younger generation that are seeking employment in the technology fields because of the quality of work and availability of well-paying jobs. Unfortunately these markets are extremely expensive for home ownership for this generation. More affordable housing is necessary to allow millennials in markets such as San Francisco, CA and Boston, MA. Some of the markets with affordable housing include Austin, TX; Dallas, TX; Des Moines, IA; Grand Rapids, MI; New Orleans, LA; Salt Lake City, UT; Seattle, WA; Minneapolis, MN; Denver, CO. Each of these markets boasts a significant population of millennials, promising job growth, affordable housing prices and plentiful inventory.
Another obstacle that lenders are most likely not aware of or haven’t seen as a problem is the person acting as intermediary between lenders and borrowers. In other words, the loan officer. According to the consulting firm of C. Cowan & Associates, the average age of a loan officer is 54 years and the average age of a realtor is 59. Not only is the age gap significant, there is a huge disconnect with the future customer according to Cowan. “The world is changing, and the best way to get good ideas is to get new minds. There are young people in the mortgage business, but that number isn’t where it should be.” (Mortgage Professional American, Dec. 2014)
There is no doubt that reaching out to this generation and creating opportunities for homeownership has to occur. Otherwise this next generation will fall further behind in wealth accumulation and could drag down the economy which is significantly dependent on housing. While there is yet to be a clear pathway developed within the industry, there are signs that things are beginning to change.
Guideline changes that recognize the debt load these individuals are carrying has been recognized as seen by the recent change by Fannie Mae to modify student loan repayment structures to use an income-based approach in calculating changes in the payment due over time. As a result the monthly payment calculation has decreased from 2% to 1% of the outstanding balance. In addition, for all student loans, regardless of their payment status, the lender must use the greater of the 1% calculation or the actual documented payment. An exception will be allowed to use the actual documented payment if it will fully amortize the loan over its term with no payment adjustment. “Therefore even if the payment is deferred we still have to factor in either the actual future payment or use the 1% calculation.
Another recent positive change is the reduction in the FHA Mortgage Insurance Premium. Late last year the amount of the monthly payment had been increased which unfortunately prevented many of this generation from purchasing their first home using this financing option. Based on the outcry from mortgage lenders, this increase was recently reversed.
The need to bring in younger loan officers that are in tune with and are comfortable with the same technology as this generation is great. However, there are very few individuals from this generation rushing to be part of an industry that has, in recent years, been viewed as one with little integrity and overwhelmed with regulation. However, one company, Churchill Mortgage headquartered in Brentwood, Tennessee has created the CMC Academy for their staff with a goal of strengthening its relationships with customers by supporting and understanding the Millennial’s unique needs. “To engage this group, we must understand their lifestyles, attitudes and the unique challenges that they face,” Mike Hardwick, president of Churchill Mortgage, previously said. It is evident that this company recognizes that this generation values trustworthiness, authenticity and accessibility due to the numerous interactions and transactions that they experience on line. They are more comfortable with text messaging vs. emails or the phone. They don’t have a lot of patience to read stacks of documents and take the time to understand the complete lending process.
The good news is that there is opportunity here for companies who see the value of understanding this generation and educating these future borrowers in a way that brings the company business and creates loyalty from the borrower. Also, mortgage companies who hire younger generation loan officers who are well trained and relate to the millennial borrower will provide the opportunity to generate loans for this segment of the market for years to come.
However, this industry has shown to be particularly reluctant to change so the challenge will be how quickly and effectively the changes that need to happen occur. We can only wait and see.
About The Author
Rebecca Walzak is a 32 year veteran and Industry Expert on Operational Risk Management and Organizational Control. She is a leader in developing Operational and Control automated assessments for lenders, rating agencies and investors. Walzak has expert knowledge in all areas of the mortgage industry including production, servicing and secondary.
Barbara Perino is a Certified Professional Co-Active Coach guiding her clients who are executive leaders and their staff. Barbara has been trained through The Coach Training Institute (CTI) located in San Rafael, CA. She completed a Coaching Certification Program through CTI and the International Coaching Federation (ICF). Prior to becoming a coach, Barbara was a 16-year veteran of the residential mortgage industry.