Last week’s column reviewed why many young Americans were putting off buying a home. Many are burdened with student debt, employment opportunities are tight and living with mom and dad doesn’t have the stigma that it once had. The Millennials, born after 1980, should be taking advantage of owning California real estate at historically affordable prices. They’re not however, and that’s slowing down sales.
Last month, the El Dorado County Association of Realtors reported 138 county sales. That was a 25 percent decline from last year same month. Listings are increasing as we move into spring — up 51 percent from March 2013 — but young families still do not seem to be in a hurry to own their own home.
This home buying reluctance phenomenon isn’t just happening in our county and region. It’s happening all over the country and if it doesn’t change it will have far-reaching effects on the housing industry and our economy. After all, our country was built on a foundation of land ownership. Our grandparents were homesteaders and homebuilders. Our wealth isn’t in paper stocks, it’s in real estate: homes, farms, offices and factories. Owning a home has been ingrained into our culture. Isn’t it part of the American Dream? Perhaps not to a large portion of 80 million Millennials. So what’s to be done?
There are social and economic issues holding back this large demographic group from being the primary source of new homebuyers. Changing the culture for these self-absorbed trophy kids who have been described as narcissistic, lazy and coddled may take a generation but we can offer immediate economic incentives to those who have the maturity and ambition to embark on homeownership.
Many of the younger-than-35 generation would buy a house but the down payment is holding them back. It shouldn’t. There are a number of no or low down payment programs available but most lenders will not promote or even suggest them to borrowers. Here’s why. Some have very low commissions or put a limit on what fees lenders may charge. Another reason is because underwriters have been schooled on underwriting conventional and FHA loans. They are unfamiliar with these niche loans. Investors often shy away from buying these loans. They take longer to process and impatient sellers and their agents are often skeptic of accepting an offer subject to the borrower qualifying for an unfamiliar loan.
These loans do exists. An example is the silent second loan program offered by El Dorado County. This second loan of up to $100,000 can be used for a down payment, closing costs and impounds, with an interest rate in the 3-percent range. These loans don’t need to be repaid until the borrower sells or refinances. They also have a debt forgiveness feature. Yes, there are some income restrictions but they exist.
According to C.J. Freeland, the county’s administrator for this loan program, “The home must be located within the unincorporated areas of El Dorado County. It must be structurally sound and priority will be given to applicants who live or work in El Dorado County.”
Finding the money for a down payment for many first-time buyers is often easier than qualifying for the loan. What were the Feds thinking when they adopted the 43 percent maximum debt-to-income ratio for a “qualified mortgage?” This rule applies regardless of large down payment and high credit scores. With an average student loan debt of $21,400 the new regulations have disqualified millions of potential homebuyers.
According to new research from the National Association of Realtors, after factoring in the average monthly income, debts and cost of a typical entry-level home mortgage, the debt-to-income for these younger than 30 is at 60 percent. Even with a 5-percent yearly increase in income, they would not be able to qualify based upon a 43 percent debt-to-income test until 2019.
The irony here is that the government is usually the primarily funder of these down payment assistance programs, attempting to encourage homeownership while at the same time adopting more stringent requirements in order to qualify for a mortgage.
The bank of mom and dad can help. A growing number of relatives are stepping up with gift money to help with the down payment or reduce debt in order to meet the new debt-to-income restrictions. According to industry estimates, 27 percent of first-time buyers received gift money to defray the down payment and closing costs. There are regulations pertaining to gifts and their appropriate documentation. Before relatives write a check, they need to talk with their neighborhood mortgage lender.
Another emerging trend, in this low-interest environment, is for mom and dad to purchase the home themselves outright and lease or finance it back to the kids. Properly structured, these loans provide annual returns to family members well in excess of money-market accounts or bank deposits and open the door to homeownership to their kin.
Rather than making it more difficult for first-time homebuyers, the Feds should offer an incentive by allowing for a tax-free savings account similar to our 401(k) plans with the money earmarked toward a down payment. This would encourage savings and homeownership.
First time homebuyers are an important element in the continuing recovery of our housing market. It will cost all of us if this demographic group, called Millennials, continues to take a laissez faire attitude about buying homes.
Ken Calhoon is a local real estate broker. He can be reached at [email protected]