Despite rising home prices and higher mortgage interest rates, millennials are more determined than ever to become homeowners, recent industry reports show.
In First American’s Second Quarter 2018 Real Estate Sentiment Index, title agents and real estate professionals report that millennial confidence in the housing market remains strong despite major headwinds including rising interest rates and soaring home prices.
On a national level, the title agents and real estate professionals surveyed for the report say they believe mortgage rates would need to hit 5.6% – 1.0 percentage point above the current rate – before first-time home buyers withdraw from the market.
“We asked the same question in the first quarter of 2017, and title agents and real estate professionals cited 5.4 percent as the mortgage rate at which first-time home buyers would withdraw from the market,” says Mark Fleming, chief economist for First American, in the report.
Respondents said in the second quarter – which includes the spring home buying season – nearly 87% of first-time home buyers were in the prime home-buying age range of 26-35.
With the Fed expected to raise rates at least two more times this year, many are wondering how rising mortgage interest rates might impact the psyches of today’s first-time homebuyers.
For now, it seems that title and real estate professionals see “more runway left” in the current housing market.
Fleming says the fact that real estate professionals are still seeing strong demand from millennials “may indicate … that the housing market is more resilient to mortgage rate increases than they thought a year ago.”
“Even though the Fed is widely expected to raise the Federal Funds rate multiple times this year, most forecasts suggest mortgage rates will just reach five percent,” Fleming says. “Based on our second quarter RESI results, purchase market demand should not be materially impacted by any modest increase in mortgage rates.”
However, lack of inventory remains a major obstacle – especially for first-time homebuyers.
“The housing market is facing its greatest supply shortage in 60 years of record keeping, according to the Federal Reserve Bank of Kansas City,” Fleming says. “The ongoing housing supply shortage will make it difficult for first-time buyers to find a home to buy, even when they are financially ready.”
Despite the perception that millennials are undeterred by rising rates and higher home prices, survey respondents expressed reduced confidence in the housing market. Overall, confidence in transaction volume growth over the next 12 months decreased 10.18% from the first quarter and was down 14.3% compared with the second quarter of 2017.
“Overall, optimism among title agents and real estate professionals decreased this quarter, likely because they indicated refinance transaction volume is expected to fall in the coming year,” Fleming says. “However, while their outlook fell for purchase transaction volume growth from last quarter, it remains positive. Increasing mortgage rates clearly impacted optimism for the refinance market.”
Title agents and real estate professionals surveyed expect home prices to increase by 4.2% in the next year – up 0.7 percentage points compared with the first quarter and up 0.1 from a year earlier.
“The expectation for further price appreciation is not surprising, given the market dynamics at play in the housing market today that are preventing more existing homeowners from selling their homes and potentially alleviating some of the supply shortage,” Fleming adds.
The most recent Millennial Tracker report from loan origination system provider Ellie Mae comes away with the same conclusion: Millennials seem undeterred by rising rates and higher home prices, and are taking up an increasing share of purchase volume.
Many mortgage lenders have been sharing the same experience: Guild Mortgage, for example, in its recently released first quarter earnings report, attributes a 13.6% year-over-year increase in origination volume in part to a vibrant first-time homebuyer market.
“We see this as a growing market as more millennials begin exploring homeownership instead of renting,” says Mary Ann McGarry, president and CEO of Guild, in a statement.
Guest post by:
Chris Carter | Residential Lending
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