Providing housing for millennials is a topic that has many implications. Dowell Myers, director of demographics at USC, approached the topic at HIVE with several esteemed colleagues.
Solving the Millenial Dilemma: Presented by Dowell Myers
Watch the follow up panel session.
But what happens now? What are some of the steps that the housing leaders and innovators can take to make a difference and provide future direction? Answers to HIVE attendees most pressing questions are below. And the conversation continues at HIVEforhousing.com.
Q: Is the multifamily boom partially buoyed by the over reach of Dodd Frank’s restriction on mortgage lending qualifications?
Sue Rossi: No – the multifamily boom was bound to happen based on the demographics. Multifamily housing is most appealing to those at the very beginning or the very end of their housing “lives.” Those would include young adults not yet ready for homeownership or seniors following homeownership. Since there is a disproportionate number of both of these groups, the increase for demand for multifamily housing was predictable.
Q: Will income inequality be more severe among millennials?
Dowell Myers: This will likely increase because economic opportunities are increasingly divided between the college grades and others, and the college graduate share of the millennials continues to grow but is not the majority.
Rossi: Not in my opinion. While salaries for entry level jobs may seem low, it’s all relative. Housing prices fell 40 percent and interest rates fell 50 percent. Those young adults who purchase a home at current prices and interest rates are still getting into homeownership with a much better future equity position than their parents, all of whom bought their first homes at double digit interest rates with incomes far lower than today’s graduates.
Q: What issues do you hope the next HUD chairman addresses over the next four years?
Rossi: My hope is that they rethink the “skin in the game” mentality and come to the realization that a minimum down FHA buyer is a much different buyer than an 80/20 buyer who borrowed 100 percent. While most of the buyers who lost their homes did have no down payment, the lack of down payment cannot be blamed to the exclusion of other sub-prime practices such as leaving the tax and insurance out of PITI and qualifying simply for principal and interest (P&I). When those buyers were qualified based solely on P&I (which was allowed) the surprise of the forthcoming tax bill caused them to refinance to pay the bill, on top of an increase in payment for future escrow, a double whammy that took them down. The lack of skin in the game mentality bled into the FHA culture, which successfully lends to buyers with minimum down payment and the result was the two buyer types became portrayed as one. Additional restrictions were imposed on FHA buyers that had nothing to do with the sub-prime practices. So my hope would be that the next chairman brings the down payment requirement back down to three percent; allows willing sellers to assist buyers to the previous levels and eases up-front MIP requirements. Last, but not least, I would like to see a new Student Loan Debt Consolidation Mortgage product added to FHA’s menu.
Q: When millennials are ready for home ownership what are they looking for? What’s most important to them?
Rossi: Millennials will buy homes for all of the same reasons as those who came before them. Before they have children, they all want a dog. That means they need a yard, and either their parents or their apartment won’t let them have a dog, so they buy a house. They want to play their music loud, which isn’t allowed at home or by their apartment. They want to entertain, or they get into a romantic relationship that requires privacy but doesn’t fit with their roommate setup. They will buy because they get married, have a child, or because their lease expires. Millennials will buy at the same rate as the Baby Boom, and for all the same reasons – they just are not there yet.
Q: How/if unaffordability of houses in good school district forces families with kids to rent?
Rossi: Families with kids have always rented in good school districts if they can’t afford to buy there. The public school system is inherently socioeconomically divisive wherever real estate taxes fund the schools. 1) Strong schools create demand for a community; 2) strong demand for the community drives up prices; 3) strong prices result in a strong tax base; 4) a strong tax base results in a strong public school budget; 5) a strong budget results in the best teachers, more programs, a wider variety of extracurricular and strong ratings; 6) strong school ratings create demand for the community and strong demand drives up prices and the cycle repeats. The only way to address this particular issue is to restructure public school funding at the local level.
Q: As we talk about innovation and disruption, why are we trying to find a way to make millennials follow the same trends as past generations as opposed to creating a new model for them?
Myers: The millennials will force new models by their own experimentation. No one is forcing them to follow past generations, but we should not “force them” to remain in their two-bedroom apartments where they rode out the great recession either. We assume they will want more housing space as they advance in their adult lives and as their careers progress. This will especially be true if they have kids, as 75 percent of them well. But, their exact neighborhood choices and preferred housing modifications are still experiments in progress!
Rossi: I don’t think we were encouraging millennials to follow the same trends. Rather, the suggestion of a Student Loan Debt Consolidation Mortgage would result in an innovative path for those who have no vision of how to fund a college education and follow it up with homeownership. This program would benefit not only first time buyers who are saddled with debt, but also existing homeowners who qualified for their starter home but deferred the debt –only to take on a mortgage payment and subsequently have the student loan debt re-enter their financial picture. Many existing homeowners are currently stuck in their starter homes and some wouldn’t qualify for the home they are currently living in despite the fact that they already own it now that their deferment has expired. This program could become a strategic plan for families as they plan for college as well as a tool for sharp high school counselors when working with students who don’t think college could be available to them.
Q: Why was the panel so for-sale focused?
Myers: The big question about millennials is not will they rent, which they already do, but will more of them transition to ownership. That has implications for their spatial location, their wealth accumulation through home appreciation, and their impact on the rest of the housing market. Moving more millennials into ownership also benefits renters because it will ease the extreme competition now felt among renters.
Rossi: You can’t discuss new construction, first time buyers and plan for what people will BUY to the exclusion of what they first have to sell. Buyers are not an independent group of people that operate autonomously. Buyers are first SELLERS, with the sole exception of first time buyers. Real estate is not looked at from a supply and demand perspective as intensely as it needs to be. Too much supply brings prices down as it does in any other industry. Lackluster demand also brings prices down. The only thing that brings prices up is when demand exceeds supply. Current demographic distribution threatens the balance of supply and demand due to the enormity of the Baby Boom, flanked by the enormity of the millennials, with an insufficient segment wedged between the two and causing a log-jam. A delicate balance has to be met in order for prices to rise without skyrocketing and to ensure that prices don’t collapse under the weight of the Baby Boom retirement liquidation. The barometer to measure that balance is the first time buyer share of market.
Q: How will the increase in rental rates impact the millennial home buying volume? Will higher rents increase home buying or reduce ability for a down payment? Is there a potential draw for millennials to cities with lower cost entry level home prices? Will these impact demographics as they age up into marriage?
Myers: High rents slow the savings of a down payment, but more importantly rising rents spur the desire to purchase a home and have something to show for your monthly payments. Relocation to markets with more affordable homeownership is definitely a spur to millennial migration. Those more affordable areas will capture more than their share of 30-somethings and also a greater share of families with children.
Rossi: Increasing rents won’t impact home buying as much as the experts would think it should. If rent rises, renters can add a roommate to offset expenses, double up and take action that’s not really practical as a homeowner. The bigger issue impacting home buyers is their ability to qualify under their debt level, and down payment requirements (and misperceptions). Rent levels inhibit their ability to save a down payment but don’t motivate them to buy as much as would be expected. Cities with lower cost entry level home prices would have lower cost of living across the board, so that becomes an equalizer as the income levels in those areas would reflect the cost of living which, in turn, is reflected in home prices.
Q: Can the millennial and Generation X dilemma of student debt be solved on the west coast where it’s ten times more expensive?
Rossi: Yes. Despite higher home values on the west coast, college tuition doesn’t change because of the location of the college. Further, where a student attends college is no indication of where they might purchase a home. So graduates with college debt are bringing the same amount of debt with them no matter where they relocate. Because home prices on the west coast are higher, the student loan portion of their total debt is not as disproportionate as it would be in a less expensive market. A $30,000 student loan balance would only be 10 percent of a $300,000 home out west, where it would be 20 percent of a $150,000 home in the suburbs of Chicago. Therefore, my proposal of a Student Loan Debt Consolidation mortgage that would allow a buyer to borrow up to 125 percent of purchase price in order to roll in their student loan balance would be successful in either market but even more successful in the more expensive markets.
Q: What incentives are needed to motivate millennials to purchase an entry-level home in C markets?
Rossi: Millennials, like all who came before them, will purchase a home in whatever market they are qualified to purchase. Depending on their income level, debt level, interest rates and real estate taxes, if a first time buyer is given an approvable price point they will find a home in whatever market that allows. While a “C” market may be an entry level market with the goal of moving in a few years or before a child becomes school age, buyers do buy in every market in the nation and there are no markets where absolutely no homes sell. Having said that, I believe there is a need for an incentive for first time buyers to buy from existing homeowners, which will ensure a sufficient number of trade-up buyers to maintain strong demand as Baby Boomers introduce an increasing level of inventory.