Millennials Make Their Move

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AMI-Millennial-Image-Cover-Story.jpgIt’s been a long time coming. The largest generational group in American history is finally entering the housing market!

The Millennials’ move from their parents’ basements to their own homes has been eagerly anticipated over the last decade by economists, policymakers, mortgage lenders and builders. With housing a crucial leg of the U.S. economy, the delayed entry of this young generation into homeownership has had serious implications for the long-term health of the country.[i] At stake is a group ranging between 80 and 92 million – whose homeownership decisions and related consumer purchasing power will drive the American economy into the middle of the 21st century.

Now, as mortgage rates remain low, changing market conditions mean Millennials are taking another look at homeownership. It’s the perfect opportunity for community banks to establish themselves with this up-and-coming segment.

The Worst-Off Generation?

Millennials, also known as Generation Y, enter the housing market in force after years of challenges. Born 1980 to 2000, they’re the generation that graduated into or just after the “Great Recession” to encounter crushing student debt burdens coupled with few available job opportunities. Many returned to live with their parents or moved into shared rentals in order to manage their debt on low-wage employment.

Their homebuying dreams receded even further as the mortgage industry adopted stricter underwriting guidelines in response to the housing crisis that began in 2008. With the lowest net worth of all generations, Millennials found themselves unable to accumulate the necessary funds for a down payment and high debt-to-income ratios effectively shut them out of many home loan programs.

This bleak environment shaped negative Millennial attitudes towards homeownership – as widely reported by the media. This cohort, potentially battered by their parents’ struggle to survive plummeting home values and job loss, allegedly shunned the traditional path of marriage, home purchase and childrearing. Much was made of Millennials’ perceived preference for easy mobility and low overhead, minimal responsibility and unconventional lifestyles. Taking on a mortgage for a suburban three-bedroom with a large backyard had little allure – or practical value – for this generation.

From Starter Income to Starter Home

As the economy continues to improve and Millennials settle into employment and marriage, community banks are becoming aware that this stereotype is fading. It turns out marriage and family formation – the traditional drivers for home purchases – for this generation have only been delayed, not rejected entirely.

Generation Y may even enjoy some advantages as prospective homebuyers. They have comparatively lower credit card debt than some other generations, although their installment debt (car and student loans) may be higher. However, their student debt loads may not be as punishing as generally believed – according to the National Association of Realtors®, 70% of student loan borrowers owe less than $25,000.[ii]

Many Millennials have good relationships with their parents. In practical terms, this means they can live inexpensively in the family home while saving for a down payment – and are also more likely to receive parental contributions to their homebuying funds.

Their overall financial situations are strengthening as the employment picture improves. According to the Labor Department, the unemployment rate for adults between 25 and 34 fell to about 5% as of February 2015. This is cheering news for Millennials hoping to achieve the job stability and steady income necessary for successful homeownership.

Overall, although marrying late and starting their families late, Millennials appear to share core attitudes with other generations about the desirability of homeownership. In a December press release, Zillow’s chief economist claimed 42% of Millennials aged 18 to 34 said they planned to buy a home in the next one to five years.[iii]

Meanwhile, the market is coming to meet them halfway.

A Zillow report released in December predicted 2015 conditions will dramatically affect the ability of Generation Y to purchase homes[iv]:

  • U.S. rents will outpace home values by the end of the year (home values up 2.5%, rents 3.5%)
  • Builders will begin constructing more lower-cost homes
  • Homebuyers will have more negotiating power in 2015

Policymakers, aware that Millennials will drive the economy in a few years, and mortgage lenders who recognize the importance of this large demographic are updating industry guidelines. The GSEs recently announced they would begin accepting 97% LTV loans. Down payments of 3% are much easier to accumulate than the standard 20% down. In addition, even that 3% can often be funded by a gift or grant. New down payment assistance programs are being unveiled by various state and community agencies with the goal of helping first-time homebuyers qualify for various loan programs.

Private mortgage insurance (MI) is helping many lenders reach out to millennial homebuyers. Community banks can accept a 3% down payment because these loans are insured with MI, protecting the lender against the risk of default. Moreover, special MI programs offer homebuyer education assistance and can support eligible first-time homebuyers with broader underwriting qualifications and a range of loan terms that may lower monthly payments by taking advantage of today’s low interest rates.

One option currently available to community banks is Arch MI’s new Millennial Mortgage program. Recognizing the triple challenge unique to Generation Y – high debt loads, small down payments, and worries about making monthly payments on modest “starter incomes” – the program offers flexible and affordable solutions like low down payments and higher debt-to-income ratios to accommodate student loans, and permits a variety of loan amortization and extended terms that may lower monthly payments. Arch MI even provides the option for lenders to reduce the amount of MI coverage purchased, which could result in an even lower monthly home loan payment.

Build a Community of Trust to Reach Millennials

With the recession fresh in their memory, having suffered three sluggish years of recovery punctuated by corporate and governmental scandals, Millennials are often characterized as a cynical bunch. In a Brookings Institution survey, only 19% agreed with the statement, “Most people can be trusted.”[v]

It’s clear that becoming a trusted advisor for your Generation Y customers may be challenging. However, community banks start out with an important advantage – they’re community-based. Millennials have strong feelings about their communities, both their real-life ones and the virtual ones they participate in online.

Community banks are natural allies for this generation, although they may need to rethink what community means in this context and adapt their approach accordingly:

  • Technology. Millennials are the most tech-savvy generation, moving easily among devices in search of the content that interests them. Studies have shown that homebuying Millennials check out homes online via convenient, easy-to-use mobile apps and conduct much of their home finance conversations by smartphone texting. Conditioned by the Internet, they also expect you to be ready any time they are. Are you ready – with operational resources, with technology investment, with trained staff – to meet these expectations?
  • Social Media. Closely intertwined with technology, social media is all about building an online community. Millennials are dedicated users of social media, as a generation that socializes continuously and with few inhibitions. As a community bank, you should expend as much energy and resources on developing these channels as you do on your actual community. The key is to actively engage your Millennial audience, rather than passively await their response to your posted material. As many of them are uncertain about their credit scores and don’t know what closing costs are, social media offers excellent opportunities to establish your community bank as a trusted expert on important homebuyer topics.
  • Recommendations and Testimonials. In the age of online reviews, Generation Y looks to see what others think. Polish your reputation as a community bank by encouraging satisfied borrowers to post reviews of your services on social media. You can also weigh the possible advantages of polling social networks for feedback, if you are confident of the response.
  • Easy Information. Millennials are big on visuals – which is why infographics is often the way to go when making your case with them. While mortgage lending is notorious for its reams of unavoidable, closely-written disclosures, develop some Millennial-friendly materials that satisfy their demand for fast, usable information in easy list or color formats.
  • Don’t Forget the Parents. Millennials like their parents and respect their opinions on many topics. A good reputation with the parents’ generation as an honest, approachable mortgage lender in your community can go a long way with their offspring. While online-focused Millennials may not be keen on attending a homebuyers’ seminar, their parents are familiar with the format. Setting up a seminar on “Helping your Adult Children Qualify for Homeownership” could be a way to indirectly facilitate Millennial home purchases.
  • Keep Up the Good Work in the Community. According to the Brookings Institution, “63% of Millennials want their employers to contribute to social or ethical causes they felt were important.” This attitude carries over to consumer purchases, as “83% expressed a stronger likelihood that they would buy from companies that supported solutions to specific social issues.” Expand your existing community-based outreach and charity programs to support popular Millennial causes and use social media to broadcast your bank’s support.

 


This sponsored article is provided by Arch Mortgage Insurance Company.


 

[i] Derek Thompson and Jordan Weissman, “The Cheapest Generation,” The Atlantic, September 2012

[ii]Jonathan Smoke, “3 Reasons Millennials Are Driving the Housing Market,” Real Estate News, realtor.com, November 14, 2014

[iii] Zillow. (December 2014). In 2015, Millennials Will Be Biggest Home Buying Group & Rents Will Grow Faster Than Home Values [Press release]. Retrieved from Zillow.com.

[iv] Emily Heffter, “Zillow Predicts Breakthrough Year for First-Time Buyers in 2015,” Zillow.com, December 1, 2014

[v] Morley Winograd and Dr. Michael Hais, “How Millennials Could Upend Wall Street and Corporate America,” Governance Studies at Brookings, May 2014