Millennials and Home Buying: A Look at Credit Scores

A young 3D woman debt consumer works to build up her credit scorAs the millennial generation continues to head-butt its way into the housing market, credit scores are creating a sizable burden on their ability to purchase a home.  A recent survey stated that 78% of the millennial generation renters do not plan on buying a home soon.

Many cite the benefits of renting as their mainstay against home buying.  However, in a recent TransUnion survey, 43% of those aged 18-34 blame subpar credit scores.

So why aren’t millennials buying houses?

Inability to obtain a fair mortgage and a general disinterest in buying.  Credit score is the biggest hurdle for the younger generation, as most mortgages have a minimum requirement of credit score.

TransUnion found that one third of adults aged 18 to 34 have a credit score in between 300 and 600. A credit score of 620 will score you a mortgage, but anything lower is a crapshoot.

On average, millennials have a shorter credit history, which means there is more gravity in a missed payment as opposed to an older home buyer.  Millennials do not have the cushion of a long credit history, so their mistakes are more prominent, resulting in lower scores.

Another thicket to cut through is the initial cost; the down payment.  TransUnion found that nearly 60% of consumers aged 18-34 worry about obtaining a down payment.  Coupled with lower credit scores, the task becomes daunting, forcing millennials to stay renting.

It will be interesting to see how the housing market adjusts to masses of millennials renting, and putting off their first home purchase.

Will home prices come down to make up for missed capital or will rents skyrocket and force millennials to reconsider?


Is the American Homeowner’s Dream Dead?

Is the American Dream of homeownership dying with Millennials, and do they even care? Will the proposed tax reform be the death knell?

Minneapolis a Top City for Millennial Homeowner Growth

Let’s start with a quick review of current housing market conditions:

  • Homeownership rates are hovering around a five decades low.
  • Low inventory rates are making it hard to find a house to buy; compounding this issue, rental inventory has become an increasingly appealing option for would-be buyers.  It’s no longer hard to find a rental unit with the bells and whistles of a million dollar house… this makes it easier for would-be buyers to “park” in a rental and shop longer for that perfect house.
  • Interest rates, by historic standards, are currently favorable for borrowing. Rates will almost certainly go up from here. Likely in 2018. This will make borrowing harder and will add to the debt burden of student loans (and credit card debt, car loans, etc.). This will hit Millennials particularly hard.
  • At approximately 85 million people, Millennials are now the largest generation; they will have an increasingly large impact on the housing market as they reach prime buying age and Boomers begin to age out.
  • Millennials have already started to take their position as the drivers of the housing market: 34% of all homebuyers today – by far the largest group of buyers – are Millennials. And, this number is expected to grow significantly in the next 3-5 years. Millennials already represent 66% of first time homebuyers, according NAR.
  • The tax reform bill working its way through Congress will potentially eliminate the appeal of the mortgage deduction.

So, what does it all mean?

Picture1There does not seem to be any major change on the horizon that will improve homeownership rates in a meaningful way. This is doubly true given the increasing importance of Millennials in the housing market and the reality that most home ownership headwinds will hit Millennials particularly hard.

Expect a continuation of low homeownership rates. Sure, most of us still want to own a plot of land to call “home.” But, the decision to own versus rent has become increasingly blurry; there are attractive rental options to ride out the low inventory environment and buying is unlikely to get easier or more attractive from a purely financial perspective.

For real estate agents, they must understand and adjust. The message is simple: there is only one “housing” market. Increasingly, your clients will debate rent versus purchase. You need to be able to service both options. Many real estate agents seem to understand this. They are starting to service the large and growing renting population in order to build long-term relationships with future home buyers; agents are also using rentals to diversifying their commission revenue during a softer sales cycle, especially agents who are new to the business.

Let me leave agents with this: as part of its 2017 housing trends report, Zillow found that 57% of first time buyers considered renting and 50% of all eventual renters considered buying.

What do you see when you read the tea leaves?

The following is some additional information for readers intended to help assess whether home ownership rates may rebound in a meaningful way:

Picture1In 2017, national housing inventory hit some of its lowest levels on record. According to Trulia, the number of homes on the market dropped for eight consecutive quarters leading up to Q1 2017, falling 5.1% over the past year. Across different housing segments, starter and trade-up home inventory fell 8.7% and 7.9% year-over-year nationally. Meanwhile, the stock of premium homes remained relatively unchanged since last year, having fallen just 1.7%.

The disproportional drop in inventory of starter homes is driving home prices higher, which in turn makes homeownership less affordable.

Interest Rates
Population2Interest rates have been hovering at or near historic lows for the past few years. Buyers – especially first-time homebuyers –  should be very motivated to borrow at today’s rates. However, credit has tightened and borrowing a mortgage requires much higher credit scores and larger down payments.

Interest rates seem to be on an upward trajectory, likely impacting buyers in two meaningful ways:

  1. Mortgage rates will increase, which makes any purchase and carrying cost, more expensive. This will compound an already high price environment caused by tight inventory constraints (more on this later).
  2. Student loans are paralyzing millennials. More than two-in-five (42%) millennials between 18-29 years old report that they, or someone in their household has student loan debt. 58% of college graduates report having student debt according to a recent Harvard IOP study. The more expensive it is to service that student loan debt, the longer it might postpone the home buying decision.

Tax Reform
PopulationThe tax reform currently being proposed by congress will cap – and all but eliminate – the mortgage interest deduction. Given the increased standard deduction ($12,000 for single and $24,000 for married taxpayers), many more taxpayers will forgo itemizing and take the standard deduction. The mortgage interest deduction is perhaps the single largest tax deduction folks make on their personal income tax return each year. Losing that benefit could present a serious disincentive to becoming a homeowner.

Residential rental properties, like owner-occupied housing, currently receive tax subsidies under existing tax rules, but the newly proposed tax plan significantly shifts the tax system to favor rentals over owner-occupied homes. This could result in increased cost of home ownership and lead to more people deciding to rent. The dramatic increase in the relative tax advantage for residential rental real estate could lead to increased home rentals in your neighborhood. Maybe it will be cost-advantageous to sell your home to a residential real estate firm and lease it back?

Finally, if the mortgage tax deduction is eliminated, Moody’s Analytics estimates that it could cause home prices nationwide to drop between 3-5%. This would likely further tighten inventory as sellers will likely balk at accepting losses in the near term.

Household formation
According to the census bureau, the muted housing recovery in recent years can be traced, in part, to slower household formation among young adults; analysis suggests that the boom and bust in housing has been a key factor. Recent weakness in household formation relative to population growth among young adults represents a reversal of the unusual strength during the boom years. The net effect has left shares of current young adults heading households at levels similar to those in the mid-1990s before the housing boom.


Source: U.S. Census Bureau, Housing Vacancy Survey and Annual Population Estimates; annual rates reflect July year-over-year percent changes.

Headship and Homeownership as share of age group population


Source: U.S. Census Bureau CPS Annual Social and Economic Supplement, Annual Population Estimates, and Housing Vacancies. Author’s calculations.

Ishay Grinberg

Renting & Buying with the “Walk Score” in Mind

1The “Walk Score” is a procedurally generated number assigned to addresses to determine their specific walkability.  The true value in this number is that the higher it is, the less likely you will need a car to comfortably live.  The “Walk Score” calculates the distances to certain amenities that most renters and buyers look for; grocery stores, public transit, nightlife, etc..  Whether you are in the market for a temporary rental or your next home, this score provides a wealth of information.

Walk Score,” an automated efficiency model, has adapted its information gathering to provide scores not only on walkability, but also transit, biking, and crime.  Taking into account all of these different metrics, walk scores range from 0 to 100.  Scores ranging from 0 – 24 dictate a car as an absolute necessity while scores 70 and above suggest that you can accomplish all errands on foot.  

The most obvious money saving benefit of the “Walk Score” is  removing most, if not all, driving from your daily routine.  Save on gas, upkeep, and maintenance, and take public transit to work.  

walkConvenience is the other major selling point of the “Walk Score.”  Easy access to amenities and recreation can make or break a neighborhood.  Higher walk scores typically translate into higher quality neighborhoods.  Pedestrian Friendliness is determined too, by analyzing population density, block length, and intersection density.

On the other side of the argument, a high “Walk Score” often results in higher prices.  In a study done by Redfin, one point of “Walk Score” was worth up to $3000.

Most websites, including, feature the score on their listings.  So before you make your next move, make sure to check the “Walk Score.”  

Millennials: Buying or Renting…and why?

There is no shortage of opinions or statistics about where and how the Millennial generation is choosing to live. We hear tropes all the time about how the young generation is flocking to urban areas, but at the same time there’s a constant drone about how they’re staying in mom and dad’s basement.

Articles abound, discussing how Millennials cannot afford to buy (or even rent in a lot of cities!) because they are saddled with debts from college. Housing costs are skyrocketing, while news stories tell us all about how Millennials are lazy, entitled, and always glued to a screen.

Team of creative people taking a break and using computer.

Millennials, like all Americans, understand the value of homeownership, but our goals and our realities may not always make owning a home a possibility, and cities, governments, and responsible developers have a role to play in helping us (and all us 99%) figure out ways to make our living choices possible, whether we rent or buy.

The signs that Millennials are ready to buy are out there:  According to a Trulia analysis of Census Bureau data, in the first quarter of 2017, more new households were formed as a purchase rather than a lease, the first time that happened in 11 years.

Other data shows that in 65% of the country, an average mortgage is less than the average rent!

Regardless of generation, one can see the value in that. Some developers are taking the path of trying to get more starter homes on the market after many years flooding the market with luxury units and McMansions.

There was a 27% increase (up to 31% of the market total) in speculative new homes under 2,250 square feet from January to March in 2017 versus the same period in 2016. And with the trend of more dense urban living, some developers are also buying and reselling homes in and around city centers where there is less land for redevelopment.

But, there are still plenty of factors pointing to a love (or need) for renting. Many Millennials are simply not ready to take the plunge into ownership, knowing that a lease can offer attractive features that a mortgage just cannot.

Others are suffering from the 8% unemployment rate for their generation and spending their money on their portion of the $1 trillion in student debt loan instead of the often 10% down payment required to purchase a home – not to mention the convenience of avoiding ongoing maintenance and repairs, insurance, etc that are not typically required with a lease.

1Consider too that many apartments today offer gyms, pools, connectivity, possibly a concierge – things not available to a homeowner. And while the tides may be changing, many apartments are still located in more community-oriented areas of town than an affordable home, with easier access to culture, nightlife, and public transit among other perks. Unlike with a purchase, a lease is temporary, so it’s very easy to pack up and leave when or if the desire strikes.

In sum, while it’s as easy to point out facts, figures, and opinions about Millennials as it has been and still is for Boomers, Gen X, and all those who preceded and will follow them, the takeaway is that each generation is made up of multi-faceted individuals with a huge variety of tastes, goals, and means. Markets shift over time and there will always be innumerable different combinations of needs, wants, and abilities when it comes to where we choose to live.