Rising Rates and Housing Affordability
We’ve seen Millennials emerge as a home-buying force in the past year, quickly becoming the largest demographic purchasing homes. This comes after years of worry that debt and economic concerns would keep them from moving out and buying houses.
But a new headwind for buyers has emerged in the past couple months, as home prices continue to rise and supply fails to keep up with demand. We’re seeing fewer starter homes on the market and a general consensus that homes priced at $300,000 and above are leading the way for the foreseeable future. (Actually, the largest sales growth in 2018 has come from homes priced at $750,000 and above, according to the National Association of Realtors.) Further, NAR reports that the home affordability index for first-time buyers dipped to 92.5 in 2018, down dramatically even in the past couple years.
That isn’t a huge problem when interest rates are at historic lows. In that scenario, a couple with a steady income can qualify for a reasonable loan without pushing things too far like in the pre-crash days. However, as rates continue to rise, loan amounts to Millennials have been shrinking since February, according to Ellie Mae. Given that Millennials have had a difficult time saving for down payments thanks to loan dependencies elsewhere (a study by MagnifyMoney showed that Millenials with student debt possess about 25% of the net worth of someone without debt). Homeowners with debt have lower value homes and owe more on their mortgages.
Add all this up, and we see a housing market that’s threatening to squeeze out the very population it needs most to keep up and running. If Millennials can’t afford the homes on the market, we’re at risk for a tightening of home values or a significant slowdown in home sale activity.
I don’t mean to say the sky is falling, but it does show the continued importance of new home construction, especially in growing areas of the country. Construction labor is thin and getting thinner, but builders and lenders who focus on efficiency can help supply the homes we need to keep our housing market running strong. More and more, lenders and builders understand the impact technology can have on both borrower experience and portfolio profitability. Millennials want a smooth loan experience, aided by technology. Let’s give it to them.