The Millennials Are Coming (To Get A Mortgage)

Millennials just aren’t buying homes — they are the first generation of Americans since World War II who will meaningfully move away from that vision of the American Dream.

Millennial homeownership rates — for those 75.4 million or so young adults between the ages of 19 and 35 — was far below historical averages and about a fifth of home ownership rate in the same age group at the turn of the 21st century.

For some, this apparent change in priority signaled a major concern about the nation’s economic future — while others heralded this changing of the tide as a sign of progress.

Washington Post opinion writer Catherine Rampell caused a minor stir earlier this year when her article “Millennials aren’t buying homes. Good for them” argued that it is a good thing that the young are staying away from the “American Dream of owning their own home” as the merits of houses as an investment are low, and the opportunity costs associated with owning one (and thus being rooted to one spot) are quite high.

“We as a society tend to overvalue homeownership, at least from a financial perspective. Were it not for the psychic and sentimental benefits of homeownership, it’s otherwise hard to imagine financial advisers counseling their clients to dump all their savings into a single, giant, highly illiquid asset,” Rampell writes.

Rampell did note that the issue did not seem to be one of desire — but of affordability.  Millennials have not, as some have argued, radically thrown off ideas about owning homes en masse. Study after study indicates the opposite — most millennials who either rent or live with their parents aspire to own homes — about 81 percent, according to the National Association of Realtors.

The issues that have kept millennials out of the mortgage market tend to fall into three categories: lack of sufficient credit, lack of sufficient funds for a down payment or lack of a sufficiently long employment record to get lenders comfortable with them as a credit risk.

But millennials are getting older, working longer, saving money — and it seems those barriers are starting to fall. And, according to TransUnion, will begin falling even more quickly over the next several years.

The 17 Million Millennials Wave

According to the latest estimates from TransUnion, between 13 and 17 million first-time homebuyers will be entering the housing market as buyers in the next five years — the vast majority of whom will be millennials.

Those numbers come from TransUnion’s First-Time Homebuyer Propensity Model.  The same model also had an aggressive prediction for the upcoming year, noting as many as three million total homebuyers coming to the market in 2017 alone.

“It’s clear that there should be many new homebuyers in the market in the next few years,” Executive Vice President of Financial services Steve Chaouki noted.
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TransUnion’s projections are based on U.S. consumers who do not currently have a mortgage, coupled with long-term estimates for growth in the mortgage purchase market and the percentage of first-time homebuyers in the traditional mortgage market.

“We are seeing that consumers between the ages of 20 and 39 are becoming an increasing important sub-set of the first-time home buying class after a long hiatus driven by the recession. In 2015, consumers in this age group represented 60 percent of first-time homebuyers — the same age group was 44 percent in the year 2000.”

The millennials are coming — and the opportunities for banks and traditional lenders abound in that coming wave.

Capturing That Millennial Customer

Millennials may be falling in line around home ownership, but they are also the generation increasingly estranged from traditional banking institutions, most likely to change banks and among the groups most easily peeled off by alternative players.

Which is a loss, particularly for banks and other traditional FIs — millennial homebuyers are a particularly attractive demographic to attract because homeowners tend to be better across-the-board credit risks than non-homeowners.

Even within the same credit risk band, owners tend to be more active credit users — which is good — but also more responsible credit users (more likely to carry a low balance and use less than 30 percent of their total borrowing power) — which is better.

They are also a very reachable group — particularly for banks bent on cross-selling.  According to TransUnion’s data, a little over 20 percent of of first-time homebuyers go on to open additional accounts with their mortgage lender. They also tend to have a bigger demand for various financial services, since first-time home ownership tends to coincide with the need for things like better retirement savings, college savings and enhanced credit access.

The story of the millennials has so far been one of the lost financial generation — the cohort that came of age during a recession and a credit crunch, crushed under a mountain of student debt — and more recently, the generation that is least likely to earn more than their parents.

But that story, according to TransUnions’s data, is shifting — and the lost generation is seemingly getting ready to get found when it comes to buying a home – and using traditional banking services.

The race, it seems, will be to the FIs that get to finding them first.