Mar282016

Policies that saved the banks deny homeownership to Millennials

By saddling Millennials with copious amounts of student loan debt and by trapping Generation X in overpriced starter homes, Millennials endure too much debt and too little available supply to become homeowners.

The largest generation in American history is not buying homes, and it’s possible, the Millennial generation will shun homeownership entirely and remake the American Dream to their own liking.

It didn’t need to be this way. The Millennials could have followed in the footsteps of the Baby Boomers or Generation X, but the foolish lending of the 00s and the bailout policies that followed created the circumstances where many Millennials can’t attain homeownership.reluctance

How did the foolish lending of the 00s create this problem?

First, imprudent student debt debilitates Millennial home shoppers. Politicians sought to enable everyone to attend the college of their choice, so they refused to effectively limit the amounts students could borrow to obtain higher education. And since politicians made it impossible to extinguish student loan debts in bankruptcy, lenders were eager to saddle students with all the debt the student was willing to take on. Of course, institutions of higher learning responded by raising tuition and fees to absorb the huge influx of borrowed money lenders made available. As a result, the Millennial generation is the most heavily indebted in history.

These huge student debt loads require servicing and repayment. Often added to credit card debts and car payments, the student loan payments contribute to the overall level of indebtedness new graduates must endure. Since Dodd-Frank capped total debt-to-income ratios for home loans at 43% of gross income, when the car, credit, and student debts are subtracted from the 43% total, many recent graduates don’t have enough income remaining to support a loan payment large enough to buy a home, in effect pricing them out of the housing market due to a lack of borrowing power.

Politicians thought they were helping these students, and lenders were eager to play their part. In the end, they only served to crush their dreams of ever owning a decent home in their lifetime.

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Second,  the previous generation, Generation X, has been trapped in entry-level homes for over a decade. The problems with excessive student loan debt among Millennials might have been manageable if house prices were low enough for Millennials to afford them. Unfortunately, while the housing bust restored sanity in the market for a brief time, pre-bubble house price levels were a slow death to the banks and very painful for the extremely indebted homeowners who overborrowed to buy homes, so the bubble needed to be inflated again.

The previous generation bought houses at inflated prices during the bubble (or refinanced into larger mortgages), so lenders reflated the housing bubble in order to bail themselves and these borrowers out of a bad situation. While manipulating for-sale home supply succeeded wildly for bankers, the policy inflated house prices so much that Millennials can’t afford them.

So many Millennials couldn’t buy houses at any price due to their excessive debts, and many who aren’t so burdened still have problems affording bubble-era house prices needed to bail out the previous generation. The federal reserve and mortgage lenders have done what they could by lowering mortgage rates to 4% or less, but this merely makes house prices too high relative to incomes, creating additional concerns about another price crash.

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Third, Millennials are rightfully weary about the prospect of another housing bust. They witnessed the carnage in housing that caused so much anguish with the previous generations, and they aren’t eager to repeat the mistakes of their forefathers. Further, they are well-educated enough to see that house prices are too high, and their best-case scenario as homeowners is to make little or no money off future appreciation. Given these realizations, it’s not surprising that a change in buyer behavior resulted from the housing bust.

Politicians and lenders did what they felt they must in order to save the banking system after the irresponsible credit orgy of the 00s. The hidden cost of their policies is that the Millennial generation has too much debt, and they aren’t buying homes. Whether deferred or dead, the American Dream is currently out of reach.

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Why finding a starter home is harder than ever

Published: Mar 23, 2016, By Daniel Goldstein

Millennials and others looking to buy a first — or “starter” — home are struggling to find ones they can afford, a new research report says.

There are fewer affordable starter homes in 95 of the 100 largest U.S. markets now compared with 2012, according to the San Francisco-based real estate research company Trulia.com. Trulia defines a starter as a home that is in the lower third of a market’s valuation and affordable to those making the median income in that market.

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“Not only are there fewer homes available to buyers of all income levels, those just starting out or making their first foray into home ownership are worse off than they’ve been in years,” said Ralph McLaughlin, chief economist with Trulia.com.

Why the inventory shortage? Investors bought many foreclosed homes that were likely starter homes during the recession and turned them into rentals, thus keeping them off the sales market, McLaughlin said. In addition, a large share of lower-priced homes are still underwater compared with premium homes, which Trulia defines as the upper third of the market, he added.”These (underwater) homeowners are unlikely to sell and take a loss,” he said. …

Finally, someone is taking note of the real reason the inventory shortage exists. Bankers engineered the MLS shortage in order to drive up house prices to restore collateral value to the bad loans they made during the housing bubble, and this shortage persists to this day. (See: What would need to happen to increase for-sale home inventory?)

In 2016, the median starter home list price was $154,156, and a buyer would need to dedicate 37% of his income just to afford it, compared with 32% in 2012, Trulia said. …

Since the GSEs will only loan 31% of gross income in a front-end debt-to-income ratio, if the median home prices requires more than that, a significant number of potential buyers are priced out. Remember, this is entirely caused by policies in government, the federal reserve, and the major banks. It isn’t caused by a normally functioning housing market.

Even though there was a gain in income over the four years, housing prices accelerated faster in those markets, McLaughlin said, outstripping the gains.

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80% of the starter home inventory in Orange County disappeared over the last four years. That will exclude an entire generation from home ownership.

Home buyers in Oakland, Calif., would have to spend nearly 70% of their income to afford a 30-year fixed-rate mortgage on a starter home, nearly a third more than they would have had to dedicate to in 2012, the report added.In fact, nine of the 10 metros experiencing the largest drop in affordability are located in California, including the cities of Los Angeles, San Jose, San Francisco, Sacramento and Riverside, and counties such as Orange County, San Diego County and Ventura County.

The market manipulations that reflated the housing bubble are a direct transfer of wealth from Generation X, Generation Y, and Millennials to Baby Boomers. Even before the housing bubble created a great deal of false wealth, baby boomers were the recipients of an artificial boost in home prices due to 25 years of falling mortgage interest rates. At least 40% of the value of their homes was created totally by increased borrowing power of subsequent buyers.

Who are the losers who pays the price for the benefit enjoyed by Baby Boomers? Millennials.

Millennials will pay a great deal to Baby Boomers through Social Security, but in addition to this burden, they must pay inflated house prices to buy Baby Boomers out of their overpriced homes. It really shouldn’t be surprising that Millennials chose to rent instead.

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