Stevie-Lynn Pickel and her fiancé, Adonis Smith, put money into a joint savings account whenever they can. The couple has a two-year plan: save up $35,000 for a down payment on a three-bedroom house, move out of the condominium they’re renting in Waterbury, Connecticut and then get married.
“We want our down payment to be 20-to-30 percent of the asking price, so our interest rates will be lower,” Pickel, 26, said. “That, and we don’t want to be paying a mortgage for 100 years.”
Homeownership rates hit a 20-year low at the end of 2014 in large part because young people like Pickel and Smith, 32, can not afford to buy a house. To help first-time homebuyers get into the market, Fannie Mae and Freddie Mac recently lowered their down payment requirements from five to three percent. But even with a lower down payment requirement, Fannie and Freddie’s new mortgage option is still more expensive than other home loans. Add to that an economy rife with stubbornly low wages and a lack of job security, especially among Millennials, and homeownership rates may drop even further in 2015.
The homeownership rate – the percentage of homes occupied by the people who own them – fell to 64 homes per 100 at the end of 2014, the lowest rate since 1994 when it was also 64.
The homeownership rate began tumbling when the housing bubble burst in 2006 and foreclosures swept across the U.S. In an attempt to right the ship, the government increased regulation and tightened lending requirements – a policy change spearheaded by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010. Government intervention achieved its goal and created a chilling effect on the lending practices of banks.
“Dodd-Frank has heavily penalized banks for making risky investments and, as a consequence, the banks have moved away from the mortgage market,” said Mike Englund, chief economist at Action Economics. “So we don’t have a willingness to extent mortgage credit.”
But the increased regulation has not dampened demand for homeownership.
A recent survey found that 59.7 percent of people who rent said that buying a house is the best long-term investment an individual can make – up from 56.9 percent the year before, according to the Zillow Mortgage Access Index.
And young people accounted for most of the increase in the Zillow survey: 66.2 percent of renters between the ages of 18 and 34 said that owning a home was the best long-term investment they could make.
“Renting is pointless,” said Pickel, the 26-year-old potential homebuyer. “My rent is $800 a month – that’s basically a mortgage payment. Plus, most landlords don’t take responsibility for their condos.”
To expand credit availability to would-be homebuyers, Fannie and Freddie announced the new 97 percent loan-to-value ratio mortgage option, which lowered minimum down payments to three percent for first-time homebuyers in December 2014.
“When you have a lowered down payment, you certainly take on more risk,” said John Councilman, president of Association of Mortgage Professionals. “Fannie and Freddie have gauged it and they must assume that the risk is not significant enough to make it a problem for them. We’re hoping that they’re correct.”
To mitigate their risk, Fannie and Freddie require that borrowers who use the 97 percent option buy mortgage insurance and another form of risk sharing like a loan level pricing adjustment – a fee based off of the borrower’s credit score and the type of house purchased.
Fannie and Freddie also increased mortgage rates for the 97 percent option and made the security a non-negotiable 30-year fixed-rate mortgage.
That’s why Pickel, the woman who lives in Waterbury, is foregoing the three-percent down payment option — she says that, in the long run, the 97 percent option would be more expensive.
“The banks like it better when you pay them a lot of money all at once,” Pickel said. “That’s why we’re saving up until we get to $35,000.”
For young, would-be first-time homebuyers like Pickel, the down payment is often the biggest hurdle to overcome, according to the National Association of Realtors. Of all the people 33-years-old-and-under surveyed by NAR, 20 percent responded that saving up for a down payment was difficult compared to 2 percent of people 59-to-67.
The 97 percent option should get people into homes, but it remains to be seen if the people who use the option will be able to afford their mortgage payments and stay in their new homes, said Councilman, the president of the Association of Mortgage Professionals.
“If a homebuyer pays the minimum down payment, it is most likely because it is all that he could come up with,” said Councilman. “So that is the concern: that the individual is unable to afford his lifestyle and save even in their current circumstance, which is presumably going to be equally as expensive or possibly less expensive than what they’re going into.”
Because they earn less money and haven’t worked for as many years, it’s toughest for young people to afford mortgage payments.
The median weekly earnings for people between 25-and-34 years old is $743, compared to $922 for 55-to-64 year olds, according to the Bureau of Labor Statistics. Additionally, the median tenure of workers ages 25-to-34 is 3 years – for 55-to-64 year olds, it’s 10.4 years.
“Young people today suffer from one thing that hasn’t been so much of a problem in the past and that is job stability,” said Councilman. “People are afraid to purchase a home and make a long-term commitment because they’re still not assured of their income and their income continuance.”
And as long as wages remain stagnant and home values continue to appreciate slowly, homeownership rates will improve only minimally, said Councilman.
“I don’t expect a huge jump in homeownership rates – not every Millennial is going to suddenly go out and start buying houses soon,” Councilman said. “But I believe, slowly, over the next few years, we will see a greater participation rate among Millennials as they increase in their job stability and income.”