March 11th, 2019 1:01 PM by Richard Sardella MLO.100007700/NMLS 233568
Millennials have a lot of misconceptions about what is required to buy a home
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
How Rates Move:
Conventional overnment (FHA and VA) lenders set their rates based on the pricing of Mortgageand G-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending sideways to very slightly lower so far today. Last week the MBS market improved by +44 bps. This was enough to move rates lower last week. We saw moderate to low rate volatility throughout the week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that have the greatest ability to impact mortgage rates this week: 1) Geopolitical, 2) Inflation and 3) Central Bank
1) Geopolitical: Unfortunately this basket or category keeps getting bigger and bigger. Global bond traders are concerned about Tuesday's most recent Brexit vote as the deadline is at the end of this month. The House of Commons is scheduled to hold a vote on the amended Withdrawal Agreement. If the vote is rejected, lawmakers will then be asked on Wednesday if the UK should take a no-deal Brexit option off the table in its negotiations. If that is rejected, then on Thursday Parliament will hold a vote on an extension to Article 50. China's big NPC will run another week, concluding on Friday with a press conference with Premier Li Keqiang. The markets will be focused on the plans from the world's second-largest economy as well as any hint on trade talks with the U.S.
2) Inflation: We will get both PPI and CPI this week. The YOY headline Consumer Price Index will carry the most weight and it is expected to remain at 1.6% with the Core CPI remaining at 2.1%. The lower these numbers are, the better it will be for pricing.
3) Central Bank: We get a very important Bank of Japan Interest Rate Decision and Policy statement along with a live press conference with BofJ Governor Kuroda. At home, we also have some Fed officials speaking. We hear from Fed Chair Jerome Powell in a 60 Minutes interview on Sunday, and he will give a speech on Monday night. We will also hear from Fed Governor Lael Brainard.
Treasury Auctions this Week:
This Week's Potential Volatility: Average
Brexit will be hanging over rate markets throughout much of the week. Even with bad news for rates, the uncertainty of Brexit will likely suppress any dramatic moves higher in rates. We could see a bit of volatility creep into the rate markets.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
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