For the past 30 years, the housing market has always rebounded from the bottom up. First time home buyers have to move off of the sidelines and buy houses. Once that happens, it creates more demand than inventory which then starts to create appreciation. Move up buyers then move up and this creates inventory for the first time home buyers.
The challenge now, however, is that the move up buyer is not buying. Either they don’t have enough equity in their home yet or they are still unsure about the economy and are not willing to take on the risk of a larger mortgage payment.
There is a false illusion today that the market is okay. Ultimately, the key to the whole real estate economy is the first time home buyer showing up to buy their first house. If they don’t, the entire market stagnates. Builders don’t build houses, roofers don’t put on roofs, landscape companies don’t design yards, fencing companies don’t build fences, etc.
Prior to mortgage meltdown, people were standing in line to buy houses. Home prices were increasing by 20-30% in some markets and people were buying houses for the wrong reasons. It was easy to do because they didn’t even need to qualify. People were buying for investment purposes only because it was the single largest appreciating asset on their balance sheet and they thought they could just sell the house next year and make a ton of money. Young couples were afraid if they didn’t buy at that time, they would soon be priced out of the market.
Now, after mortgage meltdown, housing prices are still 10-50% less than they were at their peak. A buyer still only needs a 3 1/2 % down payment and interest rates are still at all time lows. So why are first time home buyers not standing in line to buy houses?
The first thing that needs to happen is that mortgage originators and real estate agents need to understand the Millennials, this new generation of first time home buyers. From there, they have to be prepared to educate them, not just pre-qualify them.
Originators and real estate agents need to adapt to how the Millennial thinks and how they learn. This generation starts out trusting no one and they are research maniacs. This means that they take forever to make a decision. We call them the “YouTube generation” because they learn in bite-size chunks of video and are attached to their smart phones and tablets. Unfortunately, because they are so reliant on the internet for research, they are receiving a lot of misinformation. One “expert” says it’s a great time to buy and another tells them they are better off to keep renting. They hear on Good Morning America that they need a 20% down payment. Ultimately, a confused mind does nothing and that is what is happening.
The focus needs to be taken off of the decision on whether they should buy or keep renting, and instead placed on educating them to become the most informed renters possible. So, whether they are looking to buy now, in 5 months or in 5 years, they will have a plan in place to become home buyer ready.
The problem with most marketing aimed at first time home buyers is that it assumes that the consumer has already made the decision to buy a home. Providing information on what an appraisal is and why mortgage insurance may be required falls on deaf ears when the target audience hasn’t even decided whether it makes any sense to buy or if they are better off renting.
One of the biggest struggles that an originator faces is how to engage with the Millennial in the first place. There are many great products for first time home buyers aimed at providing a rent versus buy analysis. For those that are ready to buy a home right now, these tools are very helpful. The problem, however, is that many Millennials are not sure if they want to buy a home. That being the case, sharing a rent versus buy analysis does nothing to engage this consumer.
The biggest challenge that we see facing originators as they market to this Millennial generation is that they are going about it all wrong. Many don’t understand this generation of future home buyers, how they think and how they learn. Originators are accustomed to the quick sales cycle of the past several years. Therefore, they struggle with what to do or say when they have a renter who is not ready to buy now, and is unsure if they even want to buy a home at all or keep renting instead.
At best, the originator will add them to an email drip campaign that contains wonderful information on the mortgage loan process and why now is a great time to buy a home. The problem is those emails are not being read or, if they are, the message is falling on deaf ears. First of all, for a Millennial who starts out trusting no one, an email from someone they have no relationship with will just be deleted before it’s even read. Furthermore, if they haven’t even decided if they want to buy a house or keep on renting, receiving a communication about the appraisal process or what is mortgage insurance or what not to do when applying for a loan just goes to prove that the originator does not understand them.
We have to take an earlier approach with the Millennials, understanding that they start out trusting no one and don’t want to talk to anyone, but would rather conduct research themselves. Because Millennials take longer than any other generation to make a decision, originators and real estate agents also have to think long term and have a way to incubate this consumer, all the while showing empathy and building trust. The sales pipeline needs to be redefined to focus on incubating leads that will eventually turn into buyers.
So the questions become, (1) how do originators find the Millennials (2) what do they say to them once they find them, and (3) how to they incubate them eventually moving them off of the sidelines and into their first home. Even more important we believe is how originators reach this generation of future homebuyers before they’ve made the decision to buy a home, when they are in what we call the “pre pre-qual phase?” If originators can reach the Millennials at that point, employ empathy and build trust through and education first approach and nurture them along to the point that they are home buyer ready, they real estate market will be revived.
In a survey of 318 renters that we conducted, we found that 317 of them wanted to buy a home at some point. The reasons they gave for not doing so right now were job security, down payment, credit score, DTI ratio per the guidelines, DTI ratio comfort zone (for some that self imposed a stricter ratio), misinformation, mobility/liquidity and “waiting for the bottom”. Nowadays that may be waiting for inventory, waiting for a promotion, etc. Misinformation was the number one reason and, interestingly, we have found over the past four years that 22% of the time the renter has the ability to buy a home right now, they just didn’t know it.
Helping the Millennial to overcome these obstacles and create a plan to become homeownership eligible is where the focus needs to be placed. Only then will we be able to help move them off the sidelines and into their first homes.
About The Author
Cheri Booth is Vice President of Sales at Path2Buy. With over 16 years of experience in the mortgage and real estate industries specializing in database management, marketing automation and customer loyalty marketing, Cheri has a passion for helping her clients grow their business to the next level. As Vice President of Sales at Path2Buy, she oversees the client acquisition process including on-boarding, training and implementation. Her extensive marketing background as well as her many years in field sales enables her to effectively coach her clients on how to increase their purchase leads and generate a future pipeline of homebuyers while creating powerful partnerships with real estate agents and insurance agents.