The Time is Now for Millennial Homebuyers

John Neil

By John Neil

America’s central bank hasn’t raised interest rates in almost a decade – since June 2006 when Facebook was mainly for college students and had just one-tenth the users of MySpace. The Fed has repeatedly stated that it would raise rates in 2015, but surprisingly decided not to in September. Experts predict a 62 percent likelihood in March, according to CNBC.

This comes at a time when millennials – currently about 17 percent of all U.S. households – are expected to be the largest demographic group ever to enter the nation’s housing market. In a study released in December 2014, Zillow reported that 42 percent of millennials want to buy a home within the next few years.

Interest Rates and Millennials

Many millennials, defined as those born roughly between 1980 and 2000, entered the job market just after the 9/11 attacks and have endured the Great Recession and a collapse in home prices. Rising interest rates could have a negative impact on this group trying to purchase a home because even a slight change can greatly raise their total monthly payments.

Millennials are faced with low wage growth, rising rents and high student loan debt. If mortgage rates rise to 6 percent, one-third of this generation won’t be able to afford current home prices, according to HouseCanary, which analyzes and forecasts real estate data.

So how do we get 80 million millennials – which is more than the baby boomer generation – out of high-rent apartments (or their parents’ basements) and into their own homes? Take these tips into consideration for connecting with this generation:

No. 1 –Modernize your message. There isn’t one magic formula for capturing firsttime millennial homebuyers, but REALTORS ® who do it well trade traditional tactics for a fresh approach. Make the process easy to understand by using the same media millennials use, including a mobile version of your website, YouTube, blogs and social media platforms.

REALTORS can start a conversation by pushing out solid information on social media sites in a language that generation Y buyers understand. Intimidating or insider language can drive young buyers away. They want the process to be clear and simple – with high quality visuals.

Start with amazing online photos of big kitchens, open floor plans and a home office in a low-maintenance house that’s wired for technology and energy efficient. Moreover, “make sure it is move-in-ready,” says Tammy Shuyler, associate broker with Smith & Coelho in Eagle, Idaho. “Millennials don’t have the extra cash or the time to work on fixing things up.”

No. 2 – Consider their college days. The average college grad in 2014 had nearly $30,000 in student loan debt, according to the Institute for College Access and Success. Little wonder that millennials may consider it daunting to take on additional debt in the form of a mortgage.

For many, “loan payments have been deferred, and it can be difficult for them to determine their revised payments,” explains Shuyler. “If they can’t, the lender has to use one percent of the loan value as the monthly payment, and that is high in some cases.”

Adding to the situation are tighter credit conditions for first-time home buyers, who need to demonstrate that they are, in fact, creditworthy. There may be a silver lining, however. Student loan debt contains more information on an applicant’s propensity to pay on time, which may actually improve a credit score compared to millennials with a slim credit profile.

No. 3 – Educate them. Speaking of credit, many millennials require basic financial education about FICO scores. “It’s not just common sense that they know this stuff,” says Shuyler. “Many have been conservative through their college and have paid cash for everything. So they have to do some preplanning six-months to a year out.”

Additionally, first-time buyers may not have a lot of cash. Information about down-payment options can help them feel more comfortable shopping for real estate. Consider:

• Fannie Mae and Freddie Mac recently dropped the minimum down payment to 3% from 5% on some mortgages. The Federal Housing Administration (FHA) requires a 3.5% down payment.
• Earlier this year, the FHA lowered the mortgage insurance premium by .50 on FHA loans with terms greater than 15 years. The reduction reduces the cost of the average FHA loan by about $1,000 per year.
• Gift funds for a down payment are acceptable for some programs.
• Your client may qualify for local grant and/or bond programs. For example, Idaho Housing and Finance Association offers a down-payment assistance program for those with higher credit scores.
• Many lenders also offer down-payment assistance programs.

The time is now for your millennial homebuyers, when considered in light of impending interest rate increases and housing market changes. For other ways to appeal to this group, the Field Guide to Millennial Home Buyers from the National Association of REALTORS® provides an excellent resource.