Despite tight inventory and increasing home prices, many potential homebuyers — particularly millennials — remain optimistic about the market and their ability to buy a home of their own.
In fact, the Fannie Mae Home Purchase Sentiment Index hit an all-time high this past September and was at 87.8 in November, very near the high mark and up 6.6 points year-over-year.
Housing confidence
Why has housing confidence increased when the realities of the real estate market remain unchanged?
According to the National Association of Realtors (NAR), total existing housing inventory decreased 3.2 percent at the end of October, making the number of existing homes for sale 10.4 percent lower than at the same time in 2016.
Existing inventory has also declined year-over-year for 29 straight months, while the median existing-home price has increased year-over-year for 68 straight months — all of which most real estate agents are all too keenly aware.
Some attribute the increased optimism to increased supply from builders, as well as relative economic stability.
With millennials in particular, some analysts point to the cohort’s length of time as renters, a period that has been much longer than previous generations — meaning they are not only more eager to become homeowners, but also are more prepared.
Whatever the source of the optimism, the demand is clearly there, and real estate agents must be ready to help these potential homebuyers as much as they can.
Homebuying hurdles
Working with this cohort presents unique challenges and opportunities in terms of service and expectations, but real estate agents also should be aware of the financing issues that may loom for millennials eager to purchase their first home.
According to Ellie Mae, the average FICO score for all closed loans was 724 in October 2017.
Unfortunately, according to data from Experian, the average credit score for Gen Y, which overlaps with millennials, was just 634 in 2016, and the average debt load was $32,698.
This means millennials’ desire and demand for a home may face the obstacle of finding financing to make that purchase a reality. Since the financial crisis, mortgage credit availability has tightened considerably, and though it has been increasing for the past several years, it remains quite low historically, according to the Mortgage Bankers Association.
Which means, of course, that buyers with lower credit scores, significant student debt or other credit challenges may struggle to find a lender willing to finance their home purchase.
Despite these issues, finding financing is especially important for young and first-time homebuyers.
In fact, according to NAR, 88 percent of all buyers financed their home this past year, but a whopping 98 percent of younger homebuyers financed their purchase.
In addition, 23 percent of younger buyers cited saving for the down payment as the most difficult step in the homebuying process, which is in line with the 46 percent who reported having student-loan burdens with a median amount of $25,000.
Preparing millennials for entering the market
However, millennials and younger buyers can still become homeowners. Real estate agents working with these buyers should be particularly aware of the financing challenges that their clients may face and seek out lenders with programs aimed at helping buyers overcome these obstacles.
In this low-inventory environment, it is critical that potential buyers are ready to make an offer quickly and confidently, and that means getting financing in line early in the process.
Real estate agents and their millennial clients should partner with experienced and responsible mortgage lenders that offer a variety of mortgage products and programs that work with a wide range of down payment sizes and credit scores.
When evaluating lending partners, agents should look for lenders that have lower minimum credit score requirements. Some lenders even offer loan products for borrowers with credit scores as low as 500.
Agents also should look for lenders that have extended eligibility to more property types and reduced costly overlays. Some lenders also offer simplified loans that have no lender closing costs for borrowers, which can be especially helpful for younger buyers who have struggled to save for a down payment but now also must provide the cash to close.
Although consumers today may be optimistic about the housing market, they still must contend with the realities of low inventory, high prices and tight mortgage credit.
With well-prepared and knowledgeable real estate agents at their side, however, they can meet the market head on and become homeowners.
By partnering with lenders with programs tailored to first-time and millennial buyers, agents can prepare their clients to secure financing, so they can enter the swiftly moving market with confidence and purchase the home that is just right for them.
Ray Brousseau serves as president for Carrington Mortgage Services. Please follow Carrington on Twitter or LinkedIn.