First-time homebuyers are back, but who are these people?
At the beginning of the year, the folks at Realtor.com predicted that Millennials -- especially those aged 25 to 34 who entered the job market during the financial crisis -- would constitute the bulk of first-time buyers this year. Not only has that turned out to be the case, but those Millennials helped make first-time homebuyers 33% of all homebuyers in June. That's the highest percentage since July 2012 (34%). Through the first six months of 2016, first-time homebuyers have represented an average of 31% of all homebuyers, up from 30% for all of 2015.
Low mortgage rates deserve some of the credit. According to Freddie Mac, the rate for a 30-year, conventional, fixed-rate mortgage decreased to 3.48% by the end of July. That's down from 3.60% in May to 3.57% in June. Mortgage rates have now fallen four straight months and in June are the lowest they've been since May 2013 (3.42%). They're also below the 2015 average of 3.85%.
"The modest bump in June sales to first-time buyers can be attributed to mortgage rates near all-time lows and perhaps a hopeful indication that more affordable, lower-priced homes are beginning to make their way onto the market," says Lawrence Yun, chief economist for the National Association of Realtors. "The odds of closing on a home are definitely higher right now for first-time buyers living in metro areas with tamer price growth and greater entry-level supply — particularly areas in the Midwest and parts of the South."
Also, while all-cash sales were 22% of all existing-home transactions in June, individual investors paying cash accounted for less than 10% of homes in purchased in June. As a result, first-time homebuyers aren't buying homes to flip them, but to spend a good, long time in them.
A survey by TD Bank took a look at these young homebuyers and found that 65% planned to purchase their first home with cash or savings. Of that group, 33% plan to pay it off over a 15-year mortgage. However, 17% of those homebuyers haven't set aside money for unexpected repairs and costs, while 44% of Millennial homebuyers ran into $5,000 in unexpected costs during the mortgage process. While 74% of young potential homebuyers are saving up for their home, 65% say that saving for a down payment is an obstacle to homeownership.
"It's encouraging to see Millennials thoughtfully prepare to enter the housing market," says Scott Haymore, head of pricing and secondary markets at TD Bank. "With today's affordability programs, owning a home doesn't have to be a dream, it can be a reality."
That doesn't necessarily mean that it should be. Adjustable-rate mortgages and low down payments enabled many of the wost behaviors we saw during the housing crisis. Meanwhile, a seller's market has been driving up existing he median existing-home prices for four and a half years and put the average U.S. home price in June at $247,700, up 4.8% from the same time last year. During that same span, housing inventory slipped 0.9% to 2.12 million. The current 4.6-month supply is well beneath the six-month supply typically deemed healthy.
As a result, 19% of Millennials plan to ask friends and family for financial help on top of their savings, while 65% will have a spouse or partner as a co-signer. They also aren't looking for fixer-uppers, with move-in-ready homes the preferred choice for 78% of all Millennial homebuyers.
"The costs of running a household can be a shock to new home owners," Haymore says. "Monthly expenses for utilities, homeowner's association fees, cable and internet, can add up quickly. Factoring these in at the beginning of the mortgage process can help borrowers assess their overall budget and determine a realistic monthly mortgage payment."
Though three-quarters of Millennial homebuyers have made mortgage rates their key financial concern, budgeting and right-sizing their first homes might deserve greater priority. According to TD Bank, a third of all homebuyers are putting less than 20% down on a home. That 20% downpayment was viewed as a minimum as the U.S. emerged from the housing crisis and is still viewed as a sound benchmark. However, roughly 35% of Millennials can't hit that mark as a result of student loan debt, the financial crisis's impact on their careers and other issues. While 37% of Millennial homebuyers will attempt to secure mortgages that don't require as much cash up front, voices within the housing market suggest that maybe they should adjust their expectations.
For example, purchasing a lower-priced condominium might be an option for Millennials who are having a tough time affording the house of their dreams. Homebuyers received some help in July when the U.S. Senate passed new legislation loosening restrictions on condominium purchases, especially for homebuyers in lower-income groups.
"At a time of historically low mortgage rates, this is a huge win for prospective first-time and low- to moderate-income buyers interested in purchasing a condo," says Tom Salomone, president of the National Association of Realtors. "Eliminating overly burdensome restrictions on condos will help more of these prospective buyers access financing and take advantage of this affordable entry point into homeownership."