Emily Guy Birken

Mortgages, Millennials, and the Housing Market

Despite the economic fallout of Covid-19 and the logistical difficulties of buying a house in the midst of a pandemic, the housing market in 2021 is booming. Between the historically low mortgage rates and the desire for more room to weather the stay-at-home expectations, Americans are buying homes at higher rates now than they were in 2019, when the economy was stronger. And it is millennials who are leading the housing boom.

Far from the stereotype of the “perennial renter,” current 21-to-40 year olds don’t just want to drool over Zillow listings. Well-compensated and highly motivated millennials are actively looking to get a piece of the housing market. According to a Realtor.com analysis of residential mortgage loan origination, this major demographic was responsible for 45% of all new mortgages as of 2018, the latest year for which the data is available.

That doesn’t mean millennials will have a smooth road to home ownership. There are a number of issues and complications facing this generation, even if they are well-positioned for the challenges. Here’s what millennials can expect as they navigate a bustling housing market and historically low mortgages:

The Housing Shortage

Since the 2010s, there has been a deficit of homes for sale. A study by Freddie Mac estimated a supply shortage of 2.5 million homes coming into the 2020 recession. That means buying an existing home can be a bit like entering the thunderdome as demand outpaces supply.

Gwen, 30, saw this firsthand when she and her 32-year-old partner recently put in an offer on a home in St. Louis. The couple started looking for their first home together in January 2021, assuming that winter would be a slow time. That was not the case. “Most houses were only available for 3 or 4 days before going under contract,” Gwen says. “Most don't make it to the open house.” 

And even getting a chance to tour homes wasn’t always guaranteed, between the fast pace of sales and the sellers’ Covid restrictions. “It could be a struggle to get a showing appointment as they were back to back as much as the sellers allowed,” Gwen explains. 

All this helps explain why Gwen and her partner found themselves outbid on their first offer, despite having a $400,000+ price range, good credit, pre-approval, and an offer above the asking price. 

There are a number of factors that may be contributing to this housing shortage, which was already in place prior to the 2020 Covid outbreak. To start, people are less likely to move (and therefore sell their houses) during a pandemic, unless they have to. That’s affecting the supply of ready homes for sale. 

At the same time, the work from home trend—which seems to be here to stay—is changing our relationship with housing. Not only are millennials no longer interested in making do with a smaller space that has to be home, workspace, and schoolroom in one, but they also are moving to lower cost of living areas to work remotely, since a daily commute is no longer a necessity. And with little-to-no access to the dining, night life, concerts, and shows that often keeps people tied to city living, many millennials are rethinking their stance on suburban living. 

Finally, low mortgage rates can tempt would-be buyers to strike now while the iron is inexpensive. All these factors are increasing demand, but supply simply can’t keep up.

This helps explain why a Harvard Joint Center of Housing Studies analysis posits that 2021 will see “an uptick in single-family homebuilding...especially in the suburban counties of large metros and in other metro areas.”

The Capital Conundrum

When demand outpaces supply, that means one thing: higher prices. 

Even for high-earning millennials, that can cause potential issues. Having a 20% down payment set aside becomes a taller order when home prices are spiking. The amount of money you may have thought you needed for a down payment could be a fraction of what you’ll actually need.

Add to that the fact that interest rates are low right now. While that means mortgage rates are impressively tiny, it also means potential homebuyers can’t count on their money to grow in any of the usual conservative instruments that make for a safe place to stash a down payment: high-yield savings accounts, money market accounts, CDs, or Treasury bills. While none of these financial products have ever been known for growth, their current lackluster rates make them only barely better than keeping your money in cash.

Finally, banks are raising their lending standards during this time. Considering the economic uncertainty the entire country has faced over the last year, this response from lenders is entirely understandable and predictable. Banks want to feel confident that mortgages will be repaid—and there is still quite a bit of skittishness in an industry that considers the 2008 housing crisis to be recent history. 

This means only the most financially stable of borrowers can even qualify for a mortgage and take advantage of the incredible interest rates. According to the latest data from the Federal Reserve’s Consumer Credit Panel, 72% of mortgage loans in the fourth quarter of 2020 were given to applicants with credit scores over 760. Before the pandemic, only 64% of mortgage loans went to applicants with scores that high.

While high-earning professionals can often overcome these hurdles, they still should be planning for them. Saving up for a higher down payment while increasing your credit score so you can qualify for the least expensive mortgage available should be the focus of any millennial hoping to jump into homeownership. Gone are the days when simply having a high income could guarantee you a mortgage and your dream home.

The Path to Homeownership

Purchasing a home is never going to be a completely stress-free process, particularly during pandemic-induced economic uncertainty. But there are a number of strategies that millennials can adopt to give themselves as smooth a path as possible, even when the world is still reeling from major changes. Specifically, if you’re thinking of purchasing a home in the coming year, consider adopting the following strategies:

Expand Your Search Criteria

For those who have the option of working from home for the long haul, widening your geographic search to include lower cost-of-living areas can be a major cost-saver, in addition to being a good way to find areas with lower demand. This may buy you more house for the same money, since price-per-square-foot tends to go down with population density.

However, there are other ways to expand your search criteria. For instance, Gwen explains that a hot market can often lead to buyers overlooking gems that have been for sale for a while. 

“The house we ended up getting had been on the market 20 days (which is forever in this market) and was priced high,” she says. “If a house has been on the market longer than 10 days without going pending, [people] ask a lot of questions because chances are high there's something major wrong with the house.” 

But sometimes houses don’t sell for a completely cosmetic reason. “My house has an ugly green toilet and bathtub that turned people off,” Gwen explains. “We offered $10k under list with closing costs and accepted their counter for $5k more.”

Being willing to look past the house’s long time on the market (and questionable bathroom aesthetic) helped her find something that other buyers overlooked.

Get Your Financing in Place Ahead of Time

With demand at such a fever pitch, many potential buyers find themselves in bidding wars. The only way to compete in such a market is to come prepared. That means having your financing already in place before you even start looking. That way you can jump when the right house comes available.

The good news is that Unifimoney customers can apply for a mortgage right from the app. You can qualify for loans up to $2m (increasing to $3.5m within 90 days) and easily compare rates and terms with a personalized Total Cost Analysis. Best of all, Unifimoney customers can save up to $10,000 with discounts created specifically for them. 

Having your financing already set up also means you can deal with any problems that may arise during the qualification process before you have found and fallen in love with a home. Working feverishly to fix a mistake on your credit report to secure financing on a home before other bidders scoop it up is stressful and unnecessary. Take care of those issues before you start looking—and that way, your decisions aren’t clouded by real estate lust.

Take Your Time

It’s easy to get caught up in the excitement of buying your first home. But there is no deadline or race to the finish line. Just because the market is hot and the rates are low right now doesn’t mean you have to make a purchase before you are ready. Taking your time to find the right house that you can expect to live in for at least five years will ensure that you don’t rush into a major purchase that you might regret.

For Gwen, it was worth it to wait for the right house rather than compromise. “In total, we toured 5 houses” she writes. “And probably had 10 more pop up that were in our range but didn't meet something on our list we were looking for.” 

By taking their time and knowing their requirements, Gwen and her partner found the large house in a good school district that they wanted to make their home.

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