First-time homebuyers during the COVID-19 pandemics face unique challenges to acquire a home in today's market. New house inventories are limited across the nation, existing homeowners are reluctant to sell in this period of uncertainty, and lenders are raising credit and underwriting standards for new loans.
Millennials — those born between 1981 and 1996 — are the largest generation group in America, about one in five of the population. Because the average age of a first-time homebuyer is 33, millennials make up more than one-half of all homes purchased with a mortgage.
Recognizing their impact, Clever Real Estate recently released its 2021 Millennial Home Buyer Report. The report covers several areas that will interest potential home sellers, real estate investors, and realtors as the year progresses. Some of the significant findings include:
The 30-year fixed mortgage interest rate is at its lowest level in 50 years. The difference of a single percent affects thousands of dollars in interest to be paid or saved. Forty percent of millennials report that low-interest rates are the most potent motivating factor to buying a home now.
First-time homebuyers are seeking larger homes due to the impact of COVID-19 and widespread stay-in-place regulations. The trend toward remote work and the need to establish a home office are significant drivers for the desire for more living space.
In 2021, the millennials are looking for homes that average 2,400 square feet, up from 1,700 square feet a year ago. In addition to a room for working at home, millennials want large kitchens, ample outdoor space, and other amenities.
Some advisers recommend "at least a 20% down payment when buying a home." Although millennials' personal savings rates have increased, only 57% have more than $10,000 in savings, and 11% have less than $1,000.
Student debt is a major obstacle to millennials' home purchases. Eight of ten millennials consider homeownership an integral part of the American Dream, but the repayment burden of debt accumulated during college is a significant obstacle for most potential buyers.
In this competitive market, millennials are willing to take risks to buy a home: A whopping 80% would consider buying a home sight unseen — and 29% would consider buying a home after only seeing photos or a virtual tour.
In addition, 71% of millennials are amenable to a home needing major repairs. They are willing to discount the possibility that a fixer-upper can quickly turn into a money pit.
While excited about the prospect of being homeowners, 52% of millennials are stressed and anxious about buying a home. They worry about unexpected or hidden costs (47%), possible major repairs (38%), and mortgage qualification (29%).
As the economy recovers and COVID-19 restrictions end, new buyers will surge, especially for houses below $300,000. At the same time, new home construction will see limited growth during the year due to worldwide supply chain failures and trade restrictions.
While some homeowners may offer their homes for sale due to high prices, economic uncertainty and the potential emergence of new coronavirus strains will slow rapid supply increases.
The desire for more space will stimulate higher prices for houses. According to Quicken Loans, the median sales price for homes is $123 per square foot with considerable variation from one region to the next. The additional 700 square feet of space will add $86,000 to the price of the millennials' preferred house.
Flipping houses has become a popular side-business for many, especially those with the ability and experience to DIY. The growing group of flippers will see greater competition from first-time buyers seeking bargains or unable to qualify for large mortgages.
A recommended guideline for a maximum home price is three times one's annual salary. According to Pew Research, the median income of all millennials in 2018 was $62,358. Those with a bachelor's degree or higher earned $105,343 on average. Accordingly, the focus for most millennials will be properties priced under $300,000.
Flippers will be disadvantaged when competing with a potential buyer seeking a residence due to the flippers' need to adhere to a specific buying formula — the 70% Rule — to profit.
The desire for additional space, coupled with increased remote work, will intensify the trend from urban homes to suburban and rural areas where land is more available and less expensive. Populations in regions of lower-cost — the South and Midwest — will grow at the expense of the Northeast and West.
According to Experian, millennials had an average student debt of $34,504 in the first quarter of 2019. Although millennials continue to save, making a down payment of 20% will be unlikely for many struggling with student debt and the ongoing expense of family formation.
According to the Clever report, two-thirds of millennials are not planning on making a 20% down payment, more likely to pay 5% or less. Some buyers will seek seller financing for lower down payments and closing costs.
The majority of first-time buyers will turn to government-sponsored mortgages with lower requirements such as FHA, VA, and HUD. The 20% down payment rate for first-time buyers may become a thing of the past.
Student loan relief will free up income for other purposes, including the ability to make larger down payments. Unsurprising, 80% of millennials claim that student loan forgiveness of $10,000 — a controversial political issue — would greatly impact their finances.
Millennials are poised to be the dominant force in the economy. They will continue to affect every aspect of life and culture, including work and leisure activities. Their impact on real estate is profound. Will homeownership continue to be the foundation of the American Dream? Will urban areas cease to attract new residents year after year? Will houses continue to grow in space? These questions are unanswerable today.
Nevertheless, anyone in the real estate industry — developers, builders, realtors, and the host of support services — should be aware of millennials' impact. Whether buying or selling, their decisions will affect outcomes.