Coming Wave of Young Millennial Home Buyers Expected to Further Tighten Market for Starter Homes

Nearly 45 million Americans will reach the typical age for first-time home buyers in the next decade, 3.1 million more than in the 10 years prior, which could create problems for the starter home market, said Zillow Inc., Seattle.

“The demand from this coming wave of buyers will likely keep starter-home values high while those unable to purchase homes will keep pressure on the rental market,” Zillow said.

In separate reports, Ellie Mae, Pleasanton, N.J., said Millennials closed loans in March at the fastest rate in more than four years, taking advantage of interest rate drops. And Clever Real Estate, St. Louis, said Millennials are finding the home-buying and homeowning processes more stressful than other age cohorts.

The Zillow analysis noted starter homes have gained 57.3% in value over the past five years to a median increase of $47,600, while inventory in the bottom third of the market has fallen 23.2%, creating a shortage of affordable homes for first-time buyers.

The report said the typical first-time home buyer in the U.S. is 34 years old. There are 44.9 million Americans aged 24-33, or potential future first-time home buyers, compared with 41.8 million people aged 35-44, or potential past first-time home buyers, a 7.4% increase.

“The potential first-time buyer bulge, without inventory to meet it, suggests that the typical age of first-time buyers will continue to be pushed further and further out,” said Skylar Olsen, director of economic research at Zillow. “The rate of single-family construction is still behind the pace we experienced in the 1990s and without an increase in truly new supply, would-be first-time buyers will instead persist in the rental market.”

Olsen noted buyers making the transition from renting to homeownership helps ease rental demand, which limits rent-price growth. If this coming wave of buyers have to compete fiercely for homes to purchase, that could drive up rent prices as well as home values.”

Zillow said growth in potential future first-time home buyers is more extreme in some markets, including San Diego and Boston, already among the 10 least affordable large housing markets. Both metros could see a nearly 20% increase in the next wave of potential first-time home buyers compared to the previous wave.

The Ellie Mae Millennial Tracker reported Millennial took advantage of low average 30-year interest rates (4.75%) and drops in average time to close. For all loans closed by Millennials in March, 68% were conventional and 28% were FHA, while VA and other loans accounted for 2% and 3%, respectively. Among FHA loans, purchases increased to 95% in March, up from 89% the month prior. Alternatively, among conventional loans, share of purchases fell to 85%, down 1 percentage point from February.

Ellie Mae said overall, Millennials closed all loans two days faster month-over-month and the trend was consistent for both refinances and purchases. On average, refinances took 42 days to close in March, 11 days faster than the month prior, while time to close a purchase shrunk from 45 to 39 days.

The report said all closed loans in March 2019, 87% were purchase loans and 11% were refinance loans. The average FICO score for Millennial borrowers on all closed loans in March was 720, down slightly from 723 in February. Millennial males were listed as the primary borrower on 60 percent of closed loans in March. Millennial women were listed on 31 percent and the remainder of closed loans did not specify primary borrower gender.

“Homebuying tends to pick up in the spring and lower interest rates are intensifying this trend among Millennials,” said Joe Tyrrell, executive vice president of strategy and technology with Ellie Mae. “Likewise, lower interest rates are providing increased purchase power to Millennials, allowing them to participate in a very competitive home buying market.”

The Clever Real Estate report said its comparison of Millennial and Boomer homeowners found Millennials are more stressed about owning homes than any other generation.

The survey of more than 1,000 homeowners (https://listwithclever.com/real-estate-blog/millennial-homeowner-study/) found Millennials are twice as likely to be stressed about homeownership than Baby Boomers–only 13% of Baby Boomers reported feeling stressed by their homes. Millennials are also much more likely to experience buyer’s remorse than older generations, with nearly 50% of Millennial respondents feeling a least some buyer’s remorse following their purchase.

The report said one cause of this stress is money: 67% of Millennials put less than 20% down, leading to higher mortgage payments. “The biggest reason for Millennials’ buyer’s remorse was that their mortgage payments were too high,” it said.

The report also noted Millennials are planning 49% more renovations than Baby Boomers over the next five years, and they’re also three times as likely to use a personal loan and twice as likely to use a credit card to finance their renovations than Baby Boomers.

The report said Millennials were four times as likely to use their homeowner’s insurance in the past 12 months.

“It’s no surprise, millennials are new to homeownership,” the report said. “The majority of millennial homeowners (61%) have owned their homes for less than five years. On the opposite end of the spectrum, 68% of Baby Boomers have lived in their homes for over 10 years. Boomers are experienced and understand the time investment and financial costs of homeownership.”

All of this isn’t to say that millennials are, as a generation, inherently unfit to own homes, the report said. “Rather, being a young homeowner is stressful. Millennials haven’t learned the ropes yet, and their inexperience is, unsurprisingly, taking a toll–both in terms of their wallets and their emotional state.”