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The Impact of Millennials' Entry into the Housing Market: Effects on Lending

The United States has once again entered a seller's market, with homeownership on the rise. While we haven't seen numbers that rival pre-recession levels, young adults are increasingly fueling this housing market as the economy improves. Homeownership rates among Millennials is now at 36 percent, which is the largest gain within any demographic group in 2017. Lenders must be ready to meet the needs of these young adults as they look to purchase their first homes.

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Millennial Homeowners Are Coming of Age

Millennials, people born between 1980 and 1994, are this nation's largest population of adults since the Baby Boomer generation. This year, the youngest of the Millennials will turn 24, and this group of approximately 45 million young adults could soon be entering the housing market in droves.

Over the past decade, Freddie Mac reports that the percentage of Millennials heading households, or the headship rate, has been lower than prior years due to depressed incomes and an increase in home prices. Between 2000 and 2016, median home prices jumped 29 percent while real incomes per capita among young adults increased just 1 percent. The tides are shifting, however, thanks to rising cost of rents.

Rising Rents Make Home Ownership More Attractive

One of the reasons that Millennials are increasingly looking to purchase affordable homes is that rents have skyrocketed in many markets. Particularly in coastal areas, rents have become so cost-prohibitive that young adults are finding that it makes more sense to buy.

Housing analyst Josh Steiner reports that the average age of someone who is renting their first home is 26 to 27 and the average age for a first time homebuyer is 32 to 33. Based on these figures alone, the number of renters shifting to buyers could soar over the next two to five years from 4.3 million to 4.8 million.

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How Millennials Entering the Housing Market Impacts Lending

One of the factors that still holds many Millennials back from purchasing a home is the 20 percent down required for a conventional mortgage. Quite a few in this generation carry significant levels of student debt and simply don't have the capacity to put down this much on a home. However, many Millennials feel a sense of urgency about buying their first home since housing prices and interest rates continue to climb.

Even when borrowers in this group do qualify for a mortgage, there is the issue of finding a home to purchase. There continues to be a massive shortage of affordable homes nationwide. According to conservative estimates, we are short three million homes, and builders are not concentrating their efforts on middle-income homes. Builders point to rising land and construction costs as reasons for the shortfall. Despite this, there were 1.15 million completions in 2017.

A major lesson learned from the Great Recession dealt with the dangers of issuing subprime loans to borrowers who didn't have the ability to repay their debts. The lax underwriting standards applied during that period contributed to a devastating financial crisis, which both borrowers and lenders would prefer not to repeat.

While some lenders may look at factors beyond a FICO score to approve a mortgage, many are also managing their loan portfolio risk by partnering with an experienced asset management company.