What's holding back millennials from buying homes?
According to Sean Becketti, chief economist for Freddie Mac, the lack of millennial buyers ‘cannot be explained solely by the increase in student loan debt.’
Although he admits that higher student loan debt ‘certainly plays a role’ in terms of millennials' inability to purchase homes, it really depends on the borrower.
‘Recent data has confirmed that not all student debt is created equal,’ Becketti explains in Freddie Mac's September 2015 Insight & Outlook report. ‘Students who attended schools with less-certain educational benefits have not fared well. Borrowers who did not complete their studies have fared worst of all. These groups are likely to continue to affect the pattern of homeownership among millennials.
‘Moreover, a change just this month in Federal Housing Administration policy will make it more difficult for some student loan borrowers to qualify for a mortgage,’ he adds.
According to the report, there are three different types of student loan borrowers: ‘successful investors,’ ‘disappointed earners’ and ‘at-risk borrowers.’ Although the ‘at-risk borrowers’ – those who took out student loans but never graduated or landed well-paying jobs – can be ‘particularly difficult to assist,’ due to their high debt and low credit scores, the ‘disappointed earners’ – those who got their degrees, went to work, but found they could not earn enough to purchase a home – might be eligible for Freddie Mac's Home Possible Advantage program, which lets qualified borrowers get loans with as little as 3% down. Even some of the millennials who fall into the ‘successful investors’ category might want to make use of this program, Freddie Mac says.
Although the report does not mention this, a major reason why student loan debt is increasing is because tuition rates have increased more than 20% in the last 10 years. The report also fails to say anything about the stagnation of wages and the fact that many recent graduates are working hourly jobs that pay little more than they did 10 years ago.
‘The economy has not kicked into gear yet – and the Fed's recent decision to defer increasing short-term interest rates suggests [it shares] this view,’ Becketti says. ‘At the same time, the housing market is on its way to having the best year since the recovery began.’
Freddie Mac is predicting that home sales this year will be the highest since 2007. Based on upward revisions of the 2014 Home Mortgage Disclosure Act data on mortgage origination and stronger-than-expected housing activity in the first half, the firm now predicts that originations will reach $1.53 trillion this year and $1.40 trillion in 2016.
The firm reports that the ‘faster-than-expected decline in the unemployment rate is boosting demand for homes.’ In addition, low mortgage interest rates continue to attract home buyers.
Increasing home prices and low inventory, however, will continue to affect affordability.