Housing demand is expected to remain strong fueled by a healthy labor market that has resulted in the highest credit scores among borrowers in three years, the lowest housing vacancy rate in 38 years and the largest group of millennials set to enter their prime homebuying years in 2020 as reported This Week in Real Estate in First American’s Homeownership Progress Index as well as by chief economist for the Mortgage Bankers Association. Below are a few highlights from the fourth week of July that influence our business:
Is a Turnaround Looming For The Homeownership Rate? Indeed, the homeownership rate is below what it should be, Mark Fleming, chief economist of First American, noted in a report this month. In 2018, the homeownership rate underperformed potential demand by 8.7%, and Fleming points to young adults and their lifestyle choices as the main culprit. Millennials have trailed their generational predecessors when it comes to homeownership. They’ve delayed marriage and children, which are often lifestyle triggers to purchasing a first home. Fleming notes a six percentage point difference in homeownership between millennials and Generation X at the same age of 30 years old. “But the bulk of millennials have yet to turn 30, which signals higher potential homeownership demand may be on the horizon,” he notes. The largest group of millennials by birth year will turn 30 in 2020, which puts them entering their prime homebuying years, he notes.
Millennials – the most educated generation – have the highest incomes across their generational cohorts, even when salaries are adjusted for inflation. Comparing the millennials with their predecessors at age 37, inflation-adjusted median household income is $77,000 for millennials, $72,000 for Generation X, and $69,000 for baby boomers. “Higher income leads to higher house-buying power,” Fleming notes. “Coupled with today’s 3.8 percent 30-year fixed-rate mortgage, 37-year-old millennials can afford $35,000 more home than Generation X and $52,000 more home than baby boomers at the same age.” Fleming says the homeownership rate is poised for a turnaround soon. “The gap between the potential and actual homeownership in 2018 narrowed slightly as the growth in homeownership modestly exceeded the increase in potential demand,” he says, citing First American’s Homeownership Progress Index. “We expect the homeownership rate to further close the gap with potential in the years ahead as millennials continue to make important decisions, such as attaining an education and, later in life, getting married and having children.”
Homeowner Vacancy Rate Lowest Since 1981. The U.S. homeownership rate in the second quarter dipped slightly from its level in both the first quarter of this year and one year earlier, but at 64.1 percent the Census Bureau said it was statistically unchanged. The rate hit a low of 62.9 in the second quarter of 2016, ending exactly 10 years of decline. The rate was lowest in the West where it dipped quarter-over-quarter by a half-percentage point to 59.3 percent. The rate in the Northeast rose 0.5 percent to 61.2 percent and it was essentially unchanged in the South and Midwest at 66.0 and 68.0 percent respectively. Mike Fratantoni, Chief Economist for the Mortgage Bankers Association said, “The homeowner vacancy rate, at 1.3 percent, is at its lowest level since 1981. The tightening vacancy rate can be seen in the unit totals. The number of housing units in the country rose by 1.15 million year over year to 1.40 million units and the number of occupied units increased by about the same number. That increase is divided almost exactly between owner-occupied and rental usage, at about 600,000 each. The number of vacant units declined by 32,000. “Looking ahead, we expect that underlying housing demand will remain strong, given that the largest cohort of millennials are now in their mid-20s,” Fratantoni said.
Mortgage Borrowers’ FICO Scores Rise to a 3-Year High. The average credit score of borrowers who got all types of mortgages in June rose to 731, an almost three-year high, as a strong labor market helped Americans pay their bills on time. The rate was the highest since September 2016, according to Ellie Mae. Measuring just conventional mortgages backed by Fannie Mae and Freddie Mac, the average FICO score was 742 for refinancing, the highest since November 2016, and 754 for loans to buy homes, which matched last month’s level that was the highest since June 2017, according to Ellie Mae data. Higher FICO scores weren’t the result of lenders tightening standards. The Mortgage Credit Availability Index that measures how easy it is to get a loan was at a record high in June, according to the Mortgage Bankers Association.