Editor's note: This feature appears in the July 2021 edition of MReport Magazine, available here.
"It’s deep in the race for a man to want his own roof and walls and fireplace, and we’re helping him get those things in our shabby little office.”—“Pa” Bailey to George Bailey, It’s a Wonderful Life
Owning a home has been considered the American Dream since before the classic film quoted above debuted in 1946, and for generations since. However, the continued escalation of home prices, limited inventory, and more than $1.5 trillion in student debt among young consumers means the American Dream, though still achievable, may not come as easily as it did for some in previous generations.
There are some large hurdles for someone to overcome to own a home, but that is nothing new, said Paul Buege, President and COO, Inlanta Mortgage. “If you go back to the ‘80s, and the early ‘90s, many people truly had the hopes of having homeownership, but they saw barriers that existed then that don’t exist today.”
Those barriers included interest rates of 14% or more in the early to mid-1980s and much lower income than people have today. So, there was a perception that homeownership was not achievable even back then, Buege said.
“There is an absolute path that exists. There are just different headwinds today,” Buege said. “What we are seeing with our clients is that if your definition of American Dream is homeownership, it’s possible.”
The State of Modern Homeownership
Homeownership peaked at about 69% before the Great Recession, according to Embrace Home Loans. The current rate is closer to 65%.
“The dream is very much alive, but it’s changing [with regards to] what things have to happen in order for somebody to become a first-time homebuyer,” said Allen Jingst, SVP of Sales, LenderClose. He added that the homeownership rate among Baby Boomers is in the 70-75% range, while for millennials, that rate is closer to 50%.
Some have had to consider if the American Dream of previous generations is still desirable today, or if that dream has shifted, said Camillo Melchiorre, President, IndiSoft LLC.
“I think [the traditional American Dream] is still achievable; it’s just a little further out. You have to reach for it. It’s going to take longer for first-time homebuyers, particularly those with low and moderate income. That’s where the industry has to step up to have programs to support affordable mortgages.”
However, just as with previous generations, the prospective homeowner of today needs to plan and work with a good loan officer to make the dream a reality, Buege said.
“It can’t be done casually; you have to have a plan,” Buege said. “It has to be a disciplined plan. And you should be bringing along an experienced loan officer to help you develop that plan. If you step back from the noise, if you have that discipline, you truly can buy a home. It’s different headwinds today, though. And you know, I go back to when I bought my first home in the late ‘80s, I didn’t think it was ever going to be possible to buy a home, with the double-digit interest rates. We saved like mad; worked hard to make sure we had no credit card debt, drove cars that were six to seven years old, and we were able to buy into the American Dream.”
“I think the American Dream is alive,” concurred Tom Trott, Branch Manager, Embrace Home Loans. “It’s just more of a challenge now.”
Though there are low down payment programs, sellers are often looking for buyers who can bring mostly cash to the table so that there are no concerns about USDA, FHA, or VA inspections, Trotter added.
Other buyers are not only bringing all cash offers but also making offers with escalation clauses promising to match any higher offer, said Jon Tobias, SVP and Area Manager, Fairway Independent Mortgage.
Unlike a rental, an owned home can also become the center of a person’s financial wherewithal, some experts pointed out. With an owned property, a consumer starts building equity that can be used as a source of credit (once enough equity is built up), rather than relying on higher-rate credit cards or personal loans.
“Most Americans still have the vast majority of their net worth wrapped up in equity, and a home seems to be the best area of savings even with pensions going to the wayside,” said Peter Butler, Executive Managing Director of Digital Operations and Platforms, Wipro Opus.
This is an important consideration, Jingst said. While homes tend to appreciate in price (though maybe not at the recent high rates), autos and most other assets tend to lose value over time.
“There’s a lot of misinformation and misunderstanding on the value that people build in their home over time and how they’re potentially using that equity versus taking on additional credit card debt or even using it to start a small business,” Jingst said.
Owning a home also has tax advantages and stability—a property owner cannot evict a person or refuse to renew a lease—that an apartment does not have, Tobias added. However, some will opt to rent because they have been outbid on multiple properties.
A new report from Bankrate has found that more millennials are experiencing homebuyer’s remorse after purchasing what was thought to be that home of their dreams.
The study found that nearly two-thirds of millennial homebuyers have expressed some degree of regret. The survey found that the older the buyer, the less likely they were to have misgivings about their purchase after the fact. In all, 64% of millennial homebuyers (ages 25-40) have some regrets about their purchase, compared to just 33% of baby boomer buyers (ages 57-75).
“Most of the regrets are money related,” Jingst said. “Largely, homes are an appreciating asset. I think there is a lack of perspective regarding the value that is being created in owning a home among newer homeowners. Yes, there are expenses, and many of them can catch an unprepared first-time homebuyer off guard. People with more life experience typically can see a bigger picture and understand the value their home is creating and have been able to capitalize on that value in various ways.”
Jingst added: from age 20-40, many life events happen that change an environment and priorities. A growing family, a change in career and income, even the events of the last few years made people think differently about the need for their home to also function as an office. Life changes often lead to priority changes that affect what you want and need from a living situation.
The Question of Risk
Home prices have appreciated rapidly in the past, of course, like just before the “Great Recession.” When market prices declined sharply, some lenders were left with upside-down real estate portfolios. Even this was not unprecedented; the same thing happened in the savings and loan crisis decades earlier, as interest rates jumped to 15% or more, while savings and loans were sitting on loans yielding far as low as 5%.
Most lenders and servicers, however, do not see the same level of risk in today’s market.
Lenders are inherently in the risk business, Jingst pointed out.
“They have to look at how they can offset risk and not take on undue risk. We sit down with them and we look at their current processes, their current programs, and how they’re how they’re taking advantage of different services available, including lien protection services and insurance products that protect them against unknown liens or judgments.”
Butler observed that “Lenders have to price for risk. And they can do it to a degree, unless something catastrophic that takes place. It’s an absolute balancing act when you’re trying to understand at what point will you be at the top of the market.”
Right now, even if a lender pulls back on mortgages, another lender will be there to fill the void, Butler added.
“The good news is that the underwriting standards of today are far more conservative than they were during the last crash,” said Matt Clarke, COO, Churchill Mortgage. “There was a double-whammy last time with rapidly rising home prices that nobody believed would reverse and some crazy loans like negative amortization ... and no income/no assets loans that all came to a head.”
Others agreed that the rules adopted after the last housing crash are likely to keep lenders from taking on too much risk.
Other recent boom cycles were driven at least in part, by “funky” financing like mortgage-backed securities and subprime loans, Melchiorre said. “That isn’t the case today. Dodd-Frank has a lot of rules that prevent that type of lenient financing.”
“The underwriters are being very cautious,” said Lynda Fazio, Area Manager, Homespire Mortgage.
To continue to take advantage of the booming market without taking on too much risk, Clarke recommended: “Ask great questions to your borrower, commit to helping them win long-term with money and their home and being an advocate that helps them buy a home right. Stick to sound lending principles and stay in touch with the families that trust you to help them with their home financing needs.”
“If you are staying in the same market and just moving up, you will both sell high and buy high, unless you are a great negotiator and find the right situation,” Clarke said. “Moving from one market to another, like perhaps Orange County, California, to Boise, Idaho, you may find a huge increase in affordability and put some cash in your pocket. With so many jobs still remote, we see many people taking advantage of those opportunities.”
Millennials tend to be focusing their homebuying in the more affordable areas—the Midwest and Mid-Atlantic, Butler said.
According to a Zillow report, people who moved to a different city in 2020 ended up in a ZIP code where average home values were nearly $27,000 lower than their previous ZIP code, even though the home they moved to was an average of 33 square feet larger. The Zillow findings were based on analysis of nationwide data from North American Van Lines.
“What that suggests to me is more movement away from the more expensive housing markets in the country,” said Jeff Tucker, Zillow Senior Economist, in a prepared statement.
Others are not moving between states but rather are using the increasing equity in their homes to renovate those properties. Many older homeowners are also using equity to make renovations so they can age in place, Trott added.
Another way people are moving up from one level of home to the next is by combining the resources of generations, with two to three (if there are nonadult children) generations of a family moving together, combining the resources of the two older generations for the home payments, Fazio said.
Up, Up, and Away?
There are three major levels of homes—the starter home, move-up, and “dream” home—though there are certainly some lesser levels in-between. Increasing home prices means increasing the gaps between the prices of various levels of homes.
Home prices have risen sharply for the past few years, but there will eventually be a levelling off, experts agree.
“The market may be reaching the top end of what is reasonable,” Clarke said. “It’s going to take a resurgence of the new home starts and people being willing to sell their homes for it to loosen up. Construction prices are just out of whack right now due to the cost of materials, and people have hunkered down in their homes for the last 18 months. My guess is that, over the next 12 to 18 months, we will see that soften a bit, and with that, home prices leveling off or even moving back to more reasonable levels.”
Melchiorre agreed: “You’re start starting to see those signs where the demand curve is changing.” Melchiorre added that there are some areas of the country that have yet to see the curve begin to flatten.
The critical element in a levelling of home prices will be additional inventory hitting the market, particularly at the lower end of the market, experts agree.
“It’s a question of getting enough houses online, so that the bidding wars stop and the houses are going for what they can appraise for,” Trott said.
That will take a while, as lumber prices escalated in the first quarter of the year. Even though they leveled off at the beginning of June, the increased cost of lumber and other raw materials meant any new inventory was still going to be expensive for new homeowners.
The rising cost of the raw materials has pushed some first-time homebuyers out of the market, at least for the time being, Tobias added.
Programs to Keep Homeownership Affordable
While affordability, inventory shortages, and other hurdles complicate the modern path to homeownership, there are numerous programs designed to help prospective buyers, but without the risk-heavy dangers that presented problems in the past.
Melchiorre noted that housing counselors could be integrated “into both sides (origination and servicing) of the business, and we see some rather creative ways to support affordable lending.” He added that IndiSoft utilizes “a fully integrated platform where the lender, counselor, and consumer could all work together” on a platform, “to execute on deals from application through closing and with the counselor providing the post-purchase counseling through our housing counselor portal.”
And, of course, there are a number of additional counseling options available from the government. The American Rescue Plan Act, signed into law in March, includes $100 million to congressionally chartered nonprofit community development organization NeighborWorks America to administer a national housing counseling program across the United States and Puerto Rico.
Lenders and governmental agencies including FHA, VA, and HUD also offer several programs designed to help consumers purchase homes.
Fairway Independent Mortgage saw a 25.9% increase in loans including down payment assistance between the January-May period in 2021, compared to the same period in 2020, according to Tobias.
The lender participates in 84 different affordable lending programs.
“There are wonderful programs out there for first-time homebuyers,” Fazio said.