Millennials Mortgage Loans Eligibility Threatened by Debt

Housing Recovery Leaves Millennials Out in the Cold
The Fiscal Times By Marine Cole
May 4, 2014 5:30 AM

The housing market is moving toward a recovery – but it won’t take off for good until young Americans have enough money to buy their first home.

Discretionary Spending Power of Millennials

So far this year, a weak housing market has been a burden on economic growth. Mortgage loan applications dropped to a 14-year low in the first quarter as homeowners refinanced at a lower rate and Americans’ appetites for house hunting ebbed. In turn, the U.S. gross domestic product grew at a seasonally adjusted annual rate of 0.1 percent in the first quarter, according to the Commerce Department.

“The weak economic growth was the result, among other things, of housing,” said Greg McBride, Bankrate.com’s chief financial analyst. “I expect we’ll see improvements in the housing market but not at the pace we've seen in the past year.”

Homes have become too expensive for many Americans, especially for young people. Prices increased 13 percent for the 12 months ending in February in 20 major cities, according to the S&P/Case-Shiller Home Price index. Additionally, the supply of homes has remained tight. “There’s really nothing that’s compelling [people] to buy,” said Keith Gumbinger, vice president at HSH.com, which publishes mortgage and consumer loan information.

But the main problem is that Americans, especially young people who are burdened by rising debt loads such as student loans, won’t be able to obtain a mortgage unless they make more money. Personal income is on the rise—it grew 0.5 percent in April—but the growth isn't as fast as needed to spur a pickup in the housing market.

“The missing ingredient is growth in household income,” said McBride. “It’s been pretty moribund for a lot of people.”

Between a lack of substantial income, rising home prices and interest rates that are higher than a year ago, affordability is compromised for young Americans.

While the share of loan applications for mortgages of $400,000 and over increased in March compared to a year ago, applications at the lower end of the market for loans valued at or under $400,000, which represents the bulk of the market, have been shrinking, according to data from the Mortgage Bankers Association.

“There’s less growth in the large part of the housing market,” said Joel Kan, director of economic forecasting at MBA. “This is caused by a lower share of first-time buyers.”

Historically, first-time buyers have represented roughly 40 percent of existing home sales, but in March, they equaled 30 percent. That figure fell as low as 26 percent in January.

“For young adults, the biggest problem is saving enough for a down payment,” said Jed Kolko, chief economist at Trulia.

Would-be-first-time home buyers are often either renting or living with their parents because they are struggling to find jobs. The employment rate among 25-to-34 year-old Americans, which is considered the prime age group for housing demand, fell to 75.5 percent in April, after hovering around 76 percent for the last three months, according to the Labor Department. But the rate hasn't returned to pre-crisis levels.

“Having a job matters for housing,” said Kolko. “Even though their job prospects have improved from a year ago, [young people] are renting first before they buy their first home.”

To make matters worse, lending standards continue to be tight, a trend that started after the financial crisis in 2008. But there are some early indications that lending may loosen up a bit  thanks in part to new mortgage rules that give more clarity to banks about  their responsibilities when it comes to default. So far, Wells Fargo is making a comeback in the sub-prime home loan market, but few other lenders, particularly banks, are following suit.

Overall, there are some encouraging signs that this may be a mere bump on the road rather than a major shift in the housing recovery.

“It’s definitely a hiccup,” said Kan. “How big of a hiccup, we don’t know yet. We expect things to firm up a bit later in the year, but more rapidly next year.”

While interest rates have increased in the past year to 4.34 percent in March, from 3.57 percent for a 30-year fixed-rate mortgage, they continue to be lower than historical averages, which eligible home buyers should note. Price appreciation has also slowed down and will be more modest from now on.

“It will take some time for young people who recently got a job to be able to purchase their first home,” said Kolko. “That’s the most important factor in the long term.”

By the Tracy Tidwell Team at ERA Henley Real Estate in Conway, AR
http://www.tracytidwell.com
Tracy: 501-472-4709   ERA: 501-327-6731