Closing in on the American Dream: Millennials and Mortgages

You have gotten your degree and settled in your career, now what? For many young adults, starting a family could be on the top of their priority list. So it’s pretty safe to assume that finding a house is on the list as well. As is the case with the job market and economy as a whole, Millennials are the largest – and potentially the most lucrative – segment in the housing market. In fact, this group has a collective spending power that exceeds a trillion dollars.[1]

Yet, research from TD Bank® reveals that nearly two-thirds of Millennials are saving cash in order to buy their first home.[2] While they are generally optimistic about owning a home, a few obstacles are hindering their progress and causing them to be surprisingly conservative with their housing budget.

Rental Prices

Rising rental prices, combined with fairly flat income growth are preventing Millennials from saving sufficiently for a down payment, enabling them to do little more than experience a “nudge toward homeownership.”

From July to August of 2016, rents grew by 0.1%, resulting in national median rent prices of $1,120 for a 1-bedroom and $1,300 for a 2-bedroom. This is 2.3% higher than in August 2015.[3]

This increase in rent is due to property managers, who are benefitting from low supply and high demand. As a result, the marker has made rent less affordable, causing Millennials to feel “trapped” into rental living despite minimal benefits like fee-free maintenance and amenities like a pool, fitness center, and laundry room.

Down Payments

The 20% down payment increasingly has become a hurdle for many people, especially Millennials, many of whom are juggling large student loan debts.

The average student debt for a 25 year old exceeds $20,000[4] while the reported household incomes for the under 30 set is less than $25,000 per year.[5]

This imbalance of debt and income presents an opportunity for banks to express genuine concern and establish a foundation for a long term relationship with Millennials by suggesting down payment programs. One bank that has focused their efforts on creating such a program is Bank of America. They worked with Atlanta-based Workforce Resource to create a web-based tool called the Bank of America Down Payment Resource Center. Powered by Down Payment Resource™, it guides consumers to down payment and closing cost assistance programs available in their region.[6]

Mortgage Interest Rates

The Federal Reserve has been pondering on raising interest rates for months with the potential to change a borrower’s monthly payment by hundreds of dollars. Home loan pricing continues to be on the rise making homeownership out of reach.

“If mortgage rates hit 6%, a third of Millennials (people younger than 35 years old) wouldn’t be able to afford homes as they’re currently listed.”[7]

The regular chatter from the Federal Reserve signaling that a rate hike is likely before the end of 2016 is doing little to raise confidence among this group – many of whom lack the financial wherewithal to try to close on a mortgage before rates could rise.

As Millennials enter the workforce they are striving to establish a strong financial foundation that would enable them to move into the future they imagine. For banks looking to either start or deepen a relationship with this young, potentially affluent segment of the population, helping them to navigate some of the topics mentioned above and move into this next phase of their lives as homeowners is a great opportunity.

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[1] Who Are Millennials, Millennial Marketing

[2] Home Buying Trends: Millennials Are Now the Largest Generation in the Housing Market; Keeping the American Dream Alive, TD Bank, July 2016

[3] National Rent Data, ApartmentList, 2016

[4] Federal Reserve Data

[5] Millennials Seduced by Big Banks, The Financial Brand, February 2015

[6] Bank of America Launches Down Payment Resource Center to Help Prospective Buyers Find Programs to Help Achieve Homeownership, Bank of America, March 2015

[7] These Home Buyers Will Be Hit the Hardest by Rising Interest Rates, Money Magazine, July 2015