MILLENNIALS AND MORTGAGES: how a shifting demographic is redefining the housing market
Millennials, those born between 1981 and 1997, introduce a set of norms and expectations befitting a new generation, now the largest in the United States.1 Traits, such as digital savviness, remaining single longer and elevated debt levels, represent not only a cultural transformation, but also a shift in the way this generation views its housing needs. In this article, Jocelyn St. James discusses how lenders looking to rebound in the real estate market will need to build systems and processes that address millennials’ specific priorities in order to remain ahead of more digitally enhanced competitors to create advantages in both single- and multi-family housing markets.
The transition from baby boomers to millennials is challenging many long-held norms within the housing industry. Millennials are well educated but have high levels of student loan debt. In the United States alone, there are 43 million borrowers with a total of nearly $1.3 trillion in debt, while the average graduate in 2016 has $37,172 in student loan debt, a six percent increase from 2015.2 Additionally, millennials graduated college during the recession, and as a result tend to be underemployed given their skill sets. High levels of college debt coupled with underemployment has resulted in a generation of cash-strapped borrowers.
Millennials represent the first generation to grow up in the largely digital age with instant access to a record amount of data. They are tech savvy, capable of conducting independent research and expect results quickly. Further, the housing market landscape is transforming from this generation’s influx of immigrants, making it a more diverse population, according to the US Census Bureau. Finally, millennials are delaying traditional major milestones, such as marriage and having children, both of which correspond with buying a house.
Mortgage lending in the single-family housing market has struggled to rebound after the housing bubble burst almost a decade ago. However, the millennial generation presents an opportunity for lenders to capitalize on a new market. In fact, 91 percent of the approximately 87 million millennial “would-be homebuyer” population plans to own a home in the future.3
Lenders can approach this demographic in one of two ways: invest the time and money to upgrade their single-family lending infrastructure and marketing to meet millennial demands or build out and enhance multi-family lending capabilities.
Traditionally, originators have tended to utilize cumbersome lending processes and outdated technologies with little focus on the overall customer experience. However, lenders looking to attract millennials will have to shift their priorities and significantly upgrade their current lending infrastructures. Millennials are used to having instant access to information at their fingertips, and generally look to avoid physical paperwork and forms.
For starters, lenders must enable their systems for e-delivery of loan documents. In order to meet the demand for real-time updates, lenders should consider building out web portals and mobile apps to ease document sharing and provide near real-time status updates on the loan lifecycle. These digital enhancements will allow millennials to experience the same level of innovation in their mortgage-buying process as they have come to take for granted in their everyday tasks such as ordering a ride or meal.
As lenders look to enhance their digital infrastructures, they will have to consider newer players in the market.
In 2015, banks experienced a four percent market share decrease, which directly correlated to the increase seen by non-bank lenders. In fact, banks only accounted for 43 percent of all loans originated, while non-bank lenders actually surpassed them and accounted for 48 percent of originations.4 Non-bank startups, such as California-based SoFi (or Social Finance Inc.), tap into the millennial market based on, among other things, creating a digital platform that leverages best-of-breed technology to generate an offer in as little as two minutes, enabling users to upload their documentation directly and deliver faster closing times. These types of institutions aren’t subject to the same regulatory constraints as traditional lenders, which helps reduce the time to closing. As additional competition emerges, banks and traditional lenders should strengthen their digital capabilities as well as streamline their processes to maximize efficiencies and ensure that their offerings remain on par with or exceed these new entities.
Investing in a robust digital infrastructure is one key to becoming a pioneer in the millennial market. However, lenders will need to implement a parallel effort to enhance their product selection, including challenging standard practices within the US residential mortgage industry.
For example, the standard minimum down payment in the United States has long been 20 percent of the value of the property. For millennials, meeting this 20 percent threshold can prove difficult with student debt burdens preventing them from saving the necessary funds.
Some lenders are already exploring safe ways to reduce this requirement. Earlier this year, Wells Fargo announced a new program requiring a down payment as low as three percent. Unlike mortgages of the pre-housing bubble era, borrowers conform to strict underwriting guidelines around credit and income under the new program. Fannie Mae has also announced that it intends to buy these loans, a move that underscores both the strength and stability of the target borrowers as well as the demand for these types of loans in the secondary market.
Along with allowing for a lower loan-to-value (LTV) ratio, lenders must recognize that the traditional 30-year fixed mortgage likely does not meet the requirements of this generation. Millennials buying mortgages are showing different trends than their parents. They view their first homes as a means of investment, holding onto their properties for an average of five to seven years. Lenders should look to diversify their portfolio of products, including offering a more robust selection of adjustable-rate mortgage (ARM) loans. While enhancing product offerings may involve upfront costs associated with building out the processes and system enhancements to accommodate these changes, there can be significant long-term benefits in terms of the subsequent expanded client base.
Finally, one of the driving factors for the population increase among this age group is an immigration influx. A 2014 report from the White House found that 15 percent of millennials were born outside of the United States. Providing mortgages to immigrants can be a key growth area for lenders looking to gain an edge in the millennial market. However, lending to non-residents and foreign nationals will likely require lenders to enhance their systems, processes and procedures.
A main factor to obtain a loan in the United States has traditionally been a high credit score. Most countries are not as credit focused as the United States, thus a recent immigrant who has a stable income and satisfactory savings may not possess a sufficient credit history. In such scenarios, lenders should modify their underwriting standards to place a higher emphasis on assets and future streams of cash flow, utilize alternative credit scores such as L2C (which focuses on historical payments of utilities) and build out either a manual underwriting process or a customized in-house automated underwriting system to handle these borrower profiles. Furthermore, systems will require updates to maintain key data fields such as non-social security number unique identifiers and foreign addresses. Adapting these standards and processes will undoubtedly involve an investment of time and money in the short run, but it will also open a market of over 12 million potential borrowers.
For lenders weary of a sudden influx of millennial homebuyers in the single-family market, an alternative option exists: build out the infrastructure to support a multi-family lending solution. Depending on the current level of participation in multi-family lending, this may involve a lender essentially building out a new segment of their credit business including, but not limited to, an origination system, processes and procedures, operations support staff and the establishment of a new relationship with the government-sponsored enterprises (GSEs).
The single-family housing market has seen a general retraction since the financial crisis due in part to stricter guidelines enforced by the GSEs. On the contrary, multi-family lending has accelerated since the 2008 crisis, a trend supported by the fact that Fannie Mae and Freddie Mac have actually loosened their credit standards in this area.
According to a 2015 study published by the Kansas City Federal Reserve Bank, the surge in multi-family homes will be supported by two demographics going forward: millennials and, less frequently noted, aging baby boomers.
The delay of major life events such as marriage and children, as well as the convenience of living in urban centers and close to public transportation, are factors that have led millennials to gravitate toward apartment complexes. When designing an apartment complex for millennials, developers can focus on smaller individual units and generally do not have to worry about accommodating parking spaces.
The second demographic likely to impact the rise of multi-family housing is the aging baby boomer population. As the baby boomer generation heads into retirement, many will look toward multi-family living as a means of downsizing. However, their wish lists are different than those of millennials. In terms of layouts, for example, baby boomers value larger kitchens and single-level floor plans. Additionally, while baby boomers want to enjoy convenience and walkable neighborhoods, they also place a high value on staying close to their family.
The US housing market is still on the road to recovery since its collapse over a decade ago. As the US population demographics shift, lenders need to invest time and money to ensure they have the proper infrastructure in place to meet the changing demands of a dynamic marketplace. Lenders can choose to build out their digital platforms and expand their product selections to meet the needs of emerging millennial homebuyers. Alternatively, lenders that choose to focus on growing their multi-family business must ensure they accommodate both millennials and baby boomers. Organizations that wish to remain viable in this evolving landscape must look internally to assess the strengths and weaknesses of their current systems, while simultaneously working with external partners to stay abreast of the industry standards. Those that fail to adapt will likely find themselves losing out to existing lenders as well as new competitors emerging in an ever-increasing digital world.
Jocelyn St. James is a Business Consultant with Sapient Global Markets based out of New York. Jocelyn has spent her career working in a variety of capacities within mortgage banking technology. She has worked on multiple initiatives within the primary and secondary markets, covering the mortgage loan lifecycle from loan originations through to MBS disclosures. Additionally, her work has covered major regulatory changes as well as FHFA scorecard deliverables.