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Soaring Entry-tier Values and Weak Credit are Closing the Doors to Homeownership

Shortages, soaring prices, and credit histories significantly weaker than past generations are closing the door to Millennials’ dreams of homeownership.  The latest market data and analysis paint a bleak picture of the hurdles facing young buyers today.

At 8 percent a year, entry-level home values rose at double the rate of top-tier homes over the past year, reaching $104,600 in May, compared to $340,100 for the median top-tier home, according to the latest market report from Zillow research.

Also, a new analysis by CoreLogic’s Archana Pradhan’s breaks out credit scores by generation.  Ms. Pradhan’s hard numbers go a long way to explain why homeownership among largest generation has fallen far short of expectations to date.

The Zillow numbers and the latest NAR existing home sales report updated findings in the 2016 State of the Nation’s Housing report, issued last week by the Harvard Joint Center for Housing Studies.  The SON found that the price of existing homes climbed 6.6 percent in 2015 to $222,400, while the real median price of new single-family homes rose 4.7 percent to $296,400.

Prices Reached New Peak in May

NAR reported last week that the median price of for all housing types broke the record for all home prices set last June ($236,300),  The median existing-home price in May was $239,700, up 4.7 percent from May 2015 ($228,900). May’s price increase marks the 51st consecutive month of year-over-year gains.

“Buyers looking for entry-level homes are having bidding wars in many markets, while it is not uncommon for high-priced homes to stay on the market a few months longer,” Zillow chief economist Svenja Gudell.   “The housing market is much more forgiving for current homeowners looking to move into a bigger, more expensive home. These buyers can be a bit more selective, and may even get a good deal.”

The share of first-time buyers was 30 percent in May, down from 32 percent both in April and a year ago, NAR reported.

While homeownership rates for households of all ages and races/ethnicities have fallen, the size of the declines varies by age, according to the State of the Nation’s Housing Report released last week by the Harvard Joint Center on Housing Studies. The largest drop has been among 35–44-year-olds, with rates dropping nearly 11 percentage points from 69.2 percent in 2004 to 58.5 percent in 2015. By comparison, the homeownership rate fell about eight percentage points among households under age 35, about seven percentage points among households aged 45–54, about six percentage points among households aged 55–64, and just two percentage points among households aged 65 and over.

Millennials Score Lowest on Credit

CoreLogic’s Archana Pradhan’s has compiled a new analysis comparing Millennials’ credit data with older generations.

Millennials (19 to 35) have less credit history (and sometimes no credit history), limited savings, and lower levels of income because they are just beginning their working careers. In contrast, households near or in retirement generally have an extensive credit history, more savings, but may have a limited fixed income if already in retirement, she wrote.

Millennial applicants have the lowest credit scores when compared with older cohorts. The average credit score for Millennials applying for a mortgage loan in the last three months (March, April, and May) was 730 compared to 738 for Generation Xers, 753 for Baby Boomers, and 770 for the Silent Generation Compared to other generations, Millennials have had less time to build their credit history.

Young adults also have the highest loan-to-value (LTV) ratios and debt-payment-to-income (DTI) ratios. The average LTV ratio for Millennials applying for a mortgage loan in the last three months was 89 percent compared to 81 percent for Generation Xers, 73 percent for Baby Boomers, and 68 percent for members of the Silent Generation. Millennials are short of savings, often have student or other debt, and are early in their working careers (hence, have lower earnings than more experienced workers). Since many of them do not have enough savings for down payments, their LTV is higher compared to other cohorts.

The average credit score for mortgage applications with two borrowers was higher than single-borrower applications for all generations. For Millennials, the average credit score for single-borrower applications was 722 compared to 735 for joint applications.

“Workers who are early in their working careers, such as today’s Millennials, generally experience more rapid earnings growth than older workers, and more rapid income growth than retired individuals. While their credit-risk attributes may look weaker than for older cohorts, this potential for faster earnings growth and more savings accumulation are important offsets in their risk profile,” Ms.  Pradhan concluded.







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