Most Millennials won’t qualify for a mortgage until 2019
The next generation of homebuyers, Millennials, have too much debt to buy their first homes. As a result, first-time homebuyer participation is at near-record lows, and the situation isn’t likely to change any time soon.
The typical sources of housing demand are largely absent; in particular, first-time homebuyer participation is at near-record low levels. First-time bomebuyers only make up 29% of the market today, compared to 40% in normal times, and without first-time homebuyers, long-term homeowners are unable to execute move-up trades. This causes sales volumes to flag across all market segments, which is what we’re seeing now.
Some point to the lack of first-time homebuyers as a significant source of pent-up demand; for example, more Millennials are living at home than any generation in recent history. Perhaps that generation will step forward and begin buying houses, but they face some significant headwinds which may keep them out of the market for many years: high unemployment, stagnant wages, large student loan debts, excessive consumer debts (credit cards and car loans).
Assuming Millennials find jobs, to become prospective homebuyers, they must save enough money to provide a down payment. I wrote the Renter’s guide to preparing for home ownership to address this issue. A disciplined saver willing to sacrifice current consumption can save for a 3.5% down payment in just under two years — two years at a minimum, and that’s only for the most disciplined and least indebted. Unfortunately, most people upon getting a new job go lease a new car and max out their credit cards. That behavior takes them out of the housing market for many more years.
Another difficult and time consuming task for the younger generation is to pay down debts to fit within the 43% back-end DTI cap. Even if they have the qualifying income and the down payment, if they have too much debt, they won’t get a house. As I mentioned above, many take on car leases and consumer debt, but the larger problem is with student loans.
Most potential homebuyers with the income to afford a house went to college to get a high-paying job; in the process, the likely acquired a huge student loan debt. It may take five, ten or twenty years to pay down this debt enough to qualify for a house. In what can only be described as another appalling example of bail-out mentality ruining America, some are suggesting we forgive these student loan debts so this generation can take on mortgage debts. Since student loan debts are all taxpayer backed, that money would come out of your pocket. Of course, short of massive debt forgiveness, this student loan debt will be a long-term drag on housing. And right now, the housing market needs more demand.
Parents, grandparents and young adults know the problem only too well: Heavy student-debt loads, persistent employment troubles stemming from the recession and newly toughened mortgage underwriting standards are all standing in the way of potential first-time home buyers in their 20s and 30s. …
First, some sobering numbers:
- Citing Census Bureau data on homeownership by age, demographer Chris Porter of John Burns Real Estate Consulting calculates that Americans who were 30 to 34 years old in 2012 — those born between 1978 and 1982 — had the lowest homeownership rate of any similarly aged group in recent decades, 47.9 percent. By contrast, Americans born between 1948 and 1957 had a 57.1 percent ownership rate by the time they hit the 30-to-34 age bracket. The figure for 2012 comes despite record low mortgage rates and bumper crops of bargain-priced foreclosures and short sales.
- Debt-to-income ratios increasingly are mortgage-application killers for would-be first-timers. The new federal 43 percent maximum debt-to-income ratio for “qualified mortgages,” a standard that was adopted nationwide last month, is particularly poorly timed for young purchasers. Because of large student debts, which average $21,402 but sometimes balloon into six figures, they may not be able to meet the standard for years.
Typically they’re already paying out large amounts on credit cards, auto loans or leases and student debt — about 30 percent of current monthly income for those age 21 to 30 as of 2012, according to a new report from research economist Gay Cororaton of the National Association of Realtors. Factoring in the cost of a typical mortgage for an entry-level purchase, the debt-to-income ratio as of 2012 for these individuals exceeded 60 percent, Cororaton estimates. Even with a 5 percent increase in income per year, they would not be able to qualify under the 43 percent debt-to-income test until 2019.
Lenders brought this problem onto themselves. When lenders embraced Ponzis during the credit bubble of the 00s, lenders competed with each other to see who could load borrowers up with more debts first. Since it was a giant Ponzi scheme, there we no regulatory or self-imposed limits on the amount of debt provided to eager Ponzis. It wasn’t until the Ponzi scheme collapsed that lenders faced the facts: not just weren’t Ponzis capable of paying back the debt, they weren’t even capable of servicing the debt they were given unless some other lender gave them more debt to make debt-service payments — the essence of a Ponzi scheme. Without the free money flowing into the hands of Ponzis, consumer spending dried up, and the economy experienced the worst drought in 80 years.
The solution to the problem was obvious: debt had to be limited to what borrowers could afford to repay without more Ponzi debt, but whose ox was to be gored? Credit cards? Nope. Student loans? Nope. Car Loans? Nope. The only limit put on lending of any kind was an overall cap on debt-to-income ratios imposed on home loans. So while other forms of debt continued largely unabated, each of these loans took away from the limit imposed on mortgage debt; consequently, purchase mortgage applications continue in the doldrums, first-time homebuyer participation is near record lows, and nobody has a good solution to the problem.
realtors have a solution: loosen mortgage standards. Some politicians even agree with this foolishness, but so far cooler heads prevail. Loosening mortgage standards, particularly the 43% DTI limit merely allows lenders to inflate another unstable Ponzi Scheme. Loading borrowers up with more debts than they can handle merely leads to another painful credit crunch. Others have propose widespread debt forgiveness, to help borrowers get DTIs back under control. This is tantamount to giving irresponsible borrowers a free pass; moral hazard dictates this will lead to even more irresponsible borrowing.
Millennial borrowers must reduce their debt loads. They could declare bankruptcy and start over; however, that solution that does not solve their student debt problems, nor does it increase the speed at which they qualify for a mortgage. Millennials could solicit gifts from relatives (as the full article above suggests), but how realistic is that? Not everyone comes from a wealthy family, and even some that have wealthy relatives either would not ask or might not be given such a gift. Free money from family is not the solution. Realistically, Millennials will need to work, sacrifice, and pay off their debts without incurring new ones if they are ever to qualify for a mortgage. Any shortcuts to this end will be disastrous — not that realtors won’t lobby for disastrous shortcuts. We can only hope politicians are wise enough not to give in to the bad alternatives that may hasten a new and painful housing bubble.
6964 East OVERLOOK Anaheim Hills, CA 92807
$2,400,000 …….. Asking Price
$600,000 ………. Purchase Price
4/10/1991 ………. Purchase Date
$1,800,000 ………. Gross Gain (Loss)
($192,000) ………… Commissions and Costs at 8%
$1,608,000 ………. Net Gain (Loss)
300.0% ………. Gross Percent Change
268.0% ………. Net Percent Change
6.2% ………… Annual Appreciation
Cost of Home Ownership
$2,400,000 …….. Asking Price
$480,000 ………… 20% Down Conventional
4.77% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,920,000 …….. Mortgage
$494,469 ………. Income Requirement
$10,039 ………… Monthly Mortgage Payment
$2,080 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$500 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$155 ………… Homeowners Association Fees
$12,774 ………. Monthly Cash Outlays
($2,267) ………. Tax Savings
($2,407) ………. Principal Amortization
$872 ………….. Opportunity Cost of Down Payment
$320 ………….. Maintenance and Replacement Reserves
$9,292 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$25,500 ………… Furnishing and Move-In Costs at 1% + $1,500
$25,500 ………… Closing Costs at 1% + $1,500
$19,200 ………… Interest Points at 1%
$480,000 ………… Down Payment
$550,200 ………. Total Cash Costs
$142,400 ………. Emergency Cash Reserves
$692,600 ………. Total Savings Needed