Home Builder Profits Confirm Millennials Are Opting for Homeownership
Each spring, millions of migrating birds return to their summer homes and signal the onset of spring. However, this year, many home builders and realtors are chirping about the return of a highly coveted species rarely seen in the U.S. for the past seven years—the first-time homebuyer. Indeed, the U.S. real estate market is experiencing a surge in first-time home buying and there are many reasons for this phenomenon: the improving jobs market, historically low interest rates, and skyrocketing apartment rents. While some observers have been claiming that it would take years for first-time homebuyers to return to the housing market, recent earnings reports from US home builders have left little doubt that the first-time homebuyer is making a strong comeback, especially among the Millennial generation.
To better understand what’s going on, let’s take a look at the recent evidence. Earlier this week, D.R. Horton Inc., a well-known U.S. home builder, reported strong quarterly results which revealed that new home sales to buyers aged 25-33 tripled in the first quarter of 2015. In addition, the National Association of Realtors (NAR) reported that sales to first-time homebuyers totaled almost 30% of all U.S. home sales last month, a statistic which continues a positive trend from last year.
The increase in first-time home is largely due to the near perfect economic conditions in the US housing market. Interest rates remain at historically low levels—in fact, interest rates are lower now than they were a year ago. The cost of purchasing a home has dropped, even though we’re in the middle of a seller’s market. The National Association of Realtors reported that their Housing Affordability Index dropped to 164.4 at the end of 2014 from 176.9 in 2013. At the same time, according to a national apartment rental survey by REIS Inc., apartment rents have increased over 10% in the past three years, making it cheaper for many Millennials to own a home rather than rent.
But that’s not all. The U.S. economy continues to keep creating jobs. The nation’s Consumer Confidence Rate has increased as the Unemployment Rate has dropped to 5.5%. There’s little doubt that young people are beginning to feel a lot better about their economic position, and as a result more of them are forming households, which is a key predictor of future homeownership.
Finally, the mortgage lending industry has recently relaxed a number of key lending guidelines which were imposed in the wake of the 2008 recession. The Federal Housing Administration (FHA) has lowered the amount of Mortgage Insurance Premium that they charge for each FHA loan, and Fannie Mae and Freddie Mac, the largest investors in the mortgage industry, have introduced a new loan program targeted specifically for first-time homebuyers that only requires a 3% down payment. Both of these new guidelines have made homeownership much more affordable for first-time homebuyers.
The proof is in the pudding. Sales of existing homes hit their highest level in 18 months in March 2015, and new home sales have increased over 24% from their February 2014 levels, according to the National Association of Home Builders.
So don’t listen to the naysayers this spring, just take a good look around your neighborhood. The real estate market is performing extremely well and the return of the first-time homebuyer is a big reason why. Some Millennials may have moved into apartments for a few years or even moved in with their parents, but the signs are everywhere that they are embracing the concept of homeownership and taking advantage of prime conditions in the housing market to buy their first home.