The United States is nearly a decade removed from the onset of one of its worst recessions. However, in spite of its severity, a recovery seems inevitable. While not where experts would like it to be, the U.S. economy appears to be heading in the right direction. Equity is returning to the market, interest rates are still historically low, affordability is returning to prominent cities and the government is making moves to bolster the rebound. For all intents and purposes, the housing market is missing one key element: first-time buyer participation. As luck would have it, the housing market appears ready to host an entirely new generation of buyers.
For the better part of the last ten years, the housing market has essentially neglected younger generations. Whether it was strict underwritings resulting from the recession or stagnant wages preventing their ability to save up a down payment, first-time buyers have been unable to actively participate in the housing market for reasons beyond their control. However, as the recovery gains traction, the prospect of Millennial participation grows. Just last month, the Federal Housing Administration (FHA) reduced mortgage insurance premiums on those borrowers with low down payments. Alone, this move should convince many younger Americans to stop renting and start buying.
The following factors should promote more first-time buyers to actively participate in the market:
Down Payments
By the end of 2014, the average buyer was putting down 15.2 percent of the sales price. Just over a year earlier, the average buyer allocated 16 percent of the homes price to the down payment. However, while the average down payment has decreased over the course of a year, many first-time buyers can’t even come close to saving enough – especially with how high rents are.
Fortunately, actions have already been taken to make accommodating a down payment as manageable as possible. Fannie Mae and Freddie Mac, in addition to the FHA, have all taken steps to help first-time buyers find their place in the housing market. Perhaps most significantly, Fannie Mae began purchasing loans with down payments as low as 3 percent. As recently as December, Fannie Mae would only take loans with a down payment of 5 percent or more. A drop of just 2 percent should be more than enough to help younger Americans get off the fence. It might even make owning cheaper than renting in some areas of the country.
“I think it proves the point that the policymakers are trying to address, that first-time homebuyers have not been a big part of the recovery,” said Daren Blomquist, vice president at RealtyTrac in Irvine, California.
Lower Premiums
Again, the government has already taken steps towards improving the economy. Fannie Mae’s willingness to purchase loans with down payments as low as 3 percent demonstrates how important it is to gain the attention of younger Americans. That said, the FHA has reduced mortgage insurance premiums. Seeing as how anybody that does not put down at least 20 percent is required to purchase mortgage insurance, it is only logical to reduce the premium of said insurance. Borrowers are, therefore, required to pay just .85 percent of the mortgage balance in fees each year. While a .05 percent drop doesn’t seem like much, it could catch he attention of those that have been on the fence about buying a home. Moreover, homeowners should expect to save approximately $900 a year with the drop in mortgage insurance premiums.
Perhaps even more importantly, the National Association of Realtors (NAR) believes that the move will directly introduce up to 140,000 new buyers to the market. Such an influx would provide an incredible boost to the entire U.S. economy. It may be just what the market needs to finally gain traction for the recovery.
“I want to talk about helping more families afford their piece of the American dream, and that is owning their own home,” Obama said in a recent speech in Phoenix. The speech was just one of many that the president is using on his “economic stimulation” tour. “Buying a home’s always been about more than owning a roof and four walls. It’s about investing in savings and building a family and planting roots in a community,” Obama added.
Credit Availability
According to the Mortgage Credit Availability Index, credit availability has increased since the start of the year.
“Several new initiatives aimed at making mortgage credit more available and affordable to consumers were recently announced and resulted in a net loosening of credit over the month,” said Mike Fratantoni, Mortgage Bankers Association’s chief economist. “Fannie Mae and Freddie Mac announced new 97 percent LTV loan programs in December aimed at expanding access to conventional financing for new and well-qualified homebuyers. Additionally, FHA announced reductions in mortgage insurance premiums (MIP). Both of these announcements were designed to provide consumers with better access to mortgage credit.”
With credit availability expanding, younger buyers will see it become easier to get approval for a loan.
