Millennial demand could create 'roaring 20s' home buying
The pandemic hit at a time when millennials are aging through the typical milestones that often lead to the purchase of a home.
"This year, the largest section of millennials will turn 30, entering their prime homeownership years," Mark Fleming, chief economist at First American Financial, said in a press release. "Though the pandemic presents new challenges to achieving homeownership, millennial lifestyle decisions will continue to support potential homeownership demand in the years ahead, meaning millennials may be poised to fuel a 'roaring 20s' of homeownership demand."
Millennials are the biggest generational demographic in the U.S. While many put off buying houses for personal or professional reasons, homeownership demand in that group grew 3 percentage points annually in 2019, compared to 1.7 points for Generation X and 0.8 points for baby boomers, according to First American's Homeownership Progress Index.
"It appears millennial homeownership has been delayed, not denied," Fleming added.
While the pandemic ushered in an economic downturn, it came with bottomed-out interest rates and a corresponding spike in mortgage demand.
In May, the average 30-year interest rate locked in by millennials dropped to 3.42% from 3.48% month-over-month and from 4.53% in May 2019, according to Ellie Mae's Millennial Tracker. It marks the lowest average millennial interest rate since Ellie Mae began its monthly report in January 2016, falling in line with the historically low mortgage rates.
Refinances made up about 53% of loans closed to millennials in May, down from April's four-year high of 55%. It's a 39 percentage point surge from 14% the year prior. The May 2020 purchase share accounted for about 47% with the remaining 1% unspecified.
"The refinance market is still strong, but as we progress further into what is traditionally peak home-buying season, we're seeing the purchase market come to life as historically low interest rates give first-time homebuyers the confidence to make the American dream a reality," Joe Tyrrell, chief operating officer at Ellie Mae, said in a press release.
As the country wrestles financial unpredictability, lenders preferred to take less risk. The average millennial FICO score hit the highest level in the Millennial Tracker's history, ticking up a point from last month to 742 and jumped 21 points year-over-year. The average age for millennial borrowers fell to 32.1 years from 32.3 years in April, but rose nearly two years from May 2019's 30.3 years. Married individuals represented approximately 63% of loans closed compared to 64% in April and 53% the year prior.
"We're in an era marked by economic volatility and this has caused lenders to tighten up their credit requirements, so it's more important than ever for millennials looking to enter the market or refinance, that they're taking good care of their finances and carefully managing their credit," Tyrrell said.
Conventional mortgages accounted for about 83% of completed loans to millennials in May, while 14% were Federal Housing Administration loans. Mortgages guaranteed by the U.S. Department of Veterans Affairs accounted for 1%, while other unspecified types of financing constituted the remaining 2%.
Males made up nearly 60% of the primary borrowers, with 29% being female and 12% unspecified. The average loan amount decreased to $212,916 from $213,990 in April, while rising from $187,432 the year prior. It took 43 days to close a loan, up from 40 days in April and 39 days the year earlier.
When split between older millennials (borrowers between 30 and 40 years old) and younger millennials (borrowers between 21 and 29 years old) the breakdowns logically shift.
The refinance share for the elder group reached 61% in May compared to 29% for the younger group. By loan type, conventional mortgages made up an 86% share for older millennials versus 75% for younger and FHA loans made up 11% and 22%, respectively.