Rising rates aren’t deterring millennials from buying homes, and here’s why

Erik J. Martin
The Mortgage Reports contributor

Millennials buying homes at higher rates

For a long time, there’s been a general assumption about millennials buying homes. Many believe they aren’t interested in owning. But new data suggest otherwise. Fresh research shows that this generation is purchasing homes at higher rates than expected:

  • Millennials have closed a higher percentage of purchase loans year-over-year.
  • Higher interest rates aren’t discouraging them from buying.
  • The average age of millennial buyers is 29.7. Their average FICO score is 722.

Experts say millennials buying homes is long overdue. Many believe this trend will continue. But market conditions need to remain favorable.

See how much home you can buy at today's mortgage rates (Dec 8th, 2019)

What the new numbers say

Ellie Mae’s most recent Millennial Tracker data had some interesting findings. In October 2018 (the most recent month tracked):

  • Gen Y bought homes at rates higher than previous years. That month, the average loan amount to millennial borrowers for all closed loans was $189,686. That’s up from October 2017’s average of $186,567.
  • Purchase loans comprised 88 percent of closed loans to Gen Y borrowers. That’s four percentage points higher than a year prior.
  • Among all closed loans to millennials: 68 percent were conventional loans; 27 percent were FHA loans; 2 percent were VA loans; and 3 percent were undisclosed.
  • Interest rates on all loans spiked to 4.96 percent. That’s the highest percentage point since Ellie Mae began tracking this data in 2016.

Reading between the research

Joe Tyrrell, executive vice president of corporate strategy for Ellie Mae, says these results are revealing.

“Millennials have closed a higher percentage of purchase loans year-over-year. That’s despite interest rates reaching 5.1 percent recently,” he says. Tyrrell adds that, in October 2016, 77 percent of all closed loans to millennials were for purchases. That number rose to 84 percent in October 2017 and 88 percent last October.

Contrary to popular belief, Tyrrell says Gen Y “has always been determined to buy homes. But we’re seeing something new now. This demographic is increasingly flocking to areas with lower costs of living. They’re prioritizing locations where their dollars go farther, for both the home and loan size.”

For example, Ellie Mae has observed strong growth in millennial purchases in Midwestern states. These include Minnesota and Ohio.

“That’s where inventory is greater,” he says. “And homes are generally more affordable.”

Bill Packer is COO of American Financial Resources. He says early data suggested that millennials weren’t keen on buying homes. But really, the average age of purchasing a home is rising with this generation.

“This is being driven by several factors,” says Packer. “They include high student loan debt and high levels of education. This has resulted in later family formation, which triggers later realization of the desire to own a home.”

Other factors discouraging ownership? Packer cites the Great Recession and a comfort among millennials with renting.

Why millennials buying homes makes sense

Chuck Biskobing, real estate attorney with Cook & James, isn’t surprised that Gen Y is more eager to buy today.

“Many are now in their thirties. These folks are no longer kids. They have stable jobs. They’ve begun creating families. And their life needs are changing” says Biskobing. “As great as apartments are when you’re young, people with a family want a house.”

What’s more, many Gen Yers are compelled to buy now due to fears of the future.

“Some worry that the good times won’t go on forever. Right or not, many think rates will rise and we will go into a recession,” Biskobing adds. “So millennials want to lock in now while they feel they can.”

Tyrrell notes two other reasons spurring Gen Y home buying.

“They’re motivated to build equity. That’s one of the main benefits of ownership, after all. And they need more space for their belongings and pets,” says Tyrrell.

Packer expects this Gen Y buying trend to pick up steam.

“Also, we’ll see more purchasing power accruing to women, minorities, and single home buyers,” he says.

Why buying now is smart

Tyrrell says current buying conditions are favorable to millennials. “The unemployment rate is very low—only 3.9 percent as of December 2018.”

Plus, we continue to enjoy a near decade-long economic boom.

“That means older millennials who were able to save or invest their money following the recession have more purchasing power,” notes Tyrrell.

Also, we haven’t hit peak home buying season yet this year.

“Millennials may have less competition buying now, during the winter months,” Tyrrell says.

Want to purchase, too? Try these tips

You can be one of the many millennials buying homes today. You simply need to improve your odds as a borrower candidate. Tyrrell suggests these steps:

  • Do your homework. “Research the housing market in your desired area. And check out the most affordable neighborhoods.”
  • Think outside your comfort zone. “Research housing choices in the suburbs versus the city. Look into more affordable options in states with higher inventory.”
  • Shop around for lenders and loan products. “Only 27 percent of millennials in our Millennial Tracker opted for FHA loans. These loans offer first-timers the chance to buy with just 3.5 percent down.”
  • Create a realistic budget and save up for your down payment. “Outline all your expenses. That way, you know exactly how much of a mortgage payment you can realistically afford.”
  • Review your credit report, and work to boost your credit score.
  • Dwindle your debt. “Pay down your outstanding debt. This includes loans with the highest interest rates first as well as student debt.”
  • Get pre-approved for a mortgage loan before you start viewing homes.

Once you get past the sensational gloom-and-doom headlines and into actual data, you can see that homeownership is happening for many, and could happen for you as well.

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